Capital inflow streak in government bonds is broken

In July, foreign investors sold positions worth 38,524 million pesos in bonds backed by the Mexican government, ending a streak of four consecutive months of foreign capital inflows, according to data from the Bank of Mexico (BdeM).

This is the second largest liquidation of Mexican government securities so far in 2024, only surpassed by the 54,937 million pesos liquidation in February.

In the year-to-date, until June there was a slight inflow of foreign capital despite the volatility of that month due to the elections; however, with the data for July the balance became negative, with an outflow of 37,446 million pesos.

The number of residents abroad is an indicator of the BdeM that shows the level of investment in the hands of foreign investors, who acquire national debt through instruments such as Federal Treasury Certificates (Cetes), Federal Government Development Bonds (Bondes) and Udibonos, among others.

According to the central bank, by the end of 2023, foreign investors held government bonds worth 1 trillion 788 thousand 933 million pesos, a figure that by the last day of July stood at 1 trillion 751 thousand 486 million.

This indicator has not shown a clear trend throughout the year, as in January a capital outflow of 20,781 million pesos was reported; in February there was another of 54,937 million; in March there was a significant recovery with an inflow of 54,806 million, followed by another of 1,636 million in April and another of 9,846 million in May.

In June, the inflow of 10,508 million pesos was reported, which surprised analysts due to the significant volatility experienced in the markets following the presidential elections. In July, a week before the collapse of the markets in Japan, the outflow amounted to 38,524 million pesos.

For Janneth Quiroz Zamora, director of financial analysis at Monex, although the capital outflow in July has to do with the uncertainty that arose as a result of the last elections, in which Claudia Sheinbaum won by a wide margin, as predicted, but the Morena party swept Congress, which opens the door to constitutional changes.

It has to do with the uncertainty that arose from the elections, where in the end we still do not know what changes the new administration may bring about, and in the face of doubt we are seeing this behavior of investors withdrawing their money.

Another factor, the specialist pointed out, is that since the end of last month there were indications that the Bank of Japan would raise its historically low interest rate, which caused more uncertainty and the liquidation of positions due to the carry trade (action in which an investor borrows in a currency with low interest rates and invests the profits in assets with higher returns), which in turn caused the Mexican currency to depreciate.