Morning Commentary: Mexico long bonds rally; EM debt improves overall on China strength

By Rebecca Melvin

New York, June 29 – Mexico’s bonds rallied on Friday, particularly the sovereign long end, ahead of the country’s presidential election on Sunday when it is widely expected that frontrunner Andres Manuel Lopez Obrador, or AMLO, of the National Regeneration Movement will be elected.

Mexico’s credit on the long end improved by ¾ point on Friday, and credit default swaps tightened 9 basis points, Stifel EM sovereign desk strategist Victor Fu said.

Perhaps softening rhetoric from the leftist candidate was encouraging investors. “Recently AMLO has softened his tone and is not sounding as radical as before, earlier in his campaign,” Fu said.

Meanwhile the rest of emerging market credit also improved on the last trading day of the month and of the quarter. The improvement was tied to a turnaround in Chinese equities.

China stocks turned positive overnight after almost 10 days of declines. In addition, the People’s Bank of China changed the wording of its statement a little bit after its latest meeting, saying it would keep liquidity “appropriately abundant,” as opposed to “appropriately stable” previously. That suggests looser policy compared to previous language, Fu said.

One name that was not enjoying the stronger tone on Friday was Argentina, which continued to see its currency slide and weakness in credit. The Argentine peso slid another 2.5% on Friday to 28.8 against the U.S. dollar.

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