Mexico Sovereign Debt: Investment Grade at a Discount
External strength supports carry, but fiscal absorption keeps the call selective
We initiate coverage of Mexico sovereigns with a Neutral issuer stance on USD-denominated bonds, an Overweight on the MEXICO 2035s and 2036s, and an Underweight on the MEXICO 2041s and 2045s. This is a curve-specific recommendation, not a full-sovereign Overweight. Mexico remains investment-grade, externally resilient and fully market-accessible, but fiscal flexibility has weakened, support for public-sector companies continues to absorb fiscal capacity, and USMCA uncertainty limits confidence in the growth denominator.
Mexico’s spread premium reflects real fiscal, policy and public-sector company risks, but we think the market is too punitive in assigning a fallen-angel risk premium to an issuer that remains investment-grade, externally resilient and fully market-accessible. The MEXICO 2035s trade around $101.8, with 198 bps of OAS, 6.1% YTW and 6.3 years of duration. The MEXICO 2036s trade around $99.1, with 198 bps of OAS, 6.2% YTW and 7.2 years of duration. That places the recommended bonds close to LatAm Broad Bond Index duration, at 6.3 and 7.2 years versus 6.4 years for the index, while giving investors investment-grade Mexico exposure rather than the benchmark’s broader mix of LatAm sovereign, corporate and lower-rated credit risk. The recommendation is not driven by headline yield, but by where we think Mexico offers the best risk-adjusted compensation. The 2035s and 2036s yield around 6.1% to 6.2%, below the 6.8% to 7.0% available in the higher-beta long-end points. We prefer the belly because it offers enough OAS to compensate investors for Mexico’s fiscal and policy-risk premium without forcing the position into the long-duration bonds most exposed to supply, index-exit sensitivity and fallen-angel risk.
