The Daily Update - Spain and Indonesia Upgrades... Rather Hold Mexico

Last week Moody's upgraded Spain’s long-term rating by one notch to Baa1, this follows S&P’s one step upward  revision to A-. Moody’s stated its review “reflects the improvements to the credit profile seen in recent years, in particular enhanced economic resiliency due to an increasingly more balanced growth profile and improved banking sector fundamentals.” Although the nation’s fundamentals have improved, we still calculate the country has a 2 star NFA ranking, so it is therefore not included in our investable universe.

Indonesia’s rating was also upgraded by one notch to Baa2, by Moody’s, bringing the rating in-line with Fitch’s, and one notch higher than S&P. We also rank Indonesia as a 2 star NFA country, having fallen from 3 stars in 2017. Even if Indonesia was within our investible remit, we would not hold the country’s bonds; in fact we never have. The reason for this is they offer little in the way of attractive-risk adjusted returns; with most sovereign bonds actually trading expensively. The 5.125% 2045s for example trade at a spread of 178bps over USTs, when similarly rated bonds with a duration of 14.6 are priced at 179bps over, so there is no spread cushion.

Meanwhile, Moody’s affirmed its A3 rating for Mexico, citing a large and diversified economy and reduced debt levels off the back of fiscal consolidation, and a more positive NAFTA negotiations backdrop. With a 3 star NFA ranking, Mexico is included in our universe of investible bonds. The USD denominated sovereign 6.05% 2040, rated Aa3 and state-owned Pemex 6.625% 2035 (Baa1) bonds, for example, look attractive to us. The former bond offers a risk-adjusted return (with yield) of ~15% and is ~3 notches cheap while Pemex 2035s currently trades at a near 5 notch spread cushion and return and yield above 25%. We would therefore much rather invest in Mexico at these levels.

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