Mexico’s financial stability at risk as Peso tumble continues

Bloomberg

Mexico’s financial stability is hanging in the balance as the peso’s tumble prompts a dangerous acceleration in outflows from the nation’s bonds, according to BNP Paribas SA.
A pullback by foreigners is particularly worrisome for authorities, who have often cited peso bond holdings by international investors as a sign of stability. Central bank policy makers will now have to act soon, BNP analysts said. Separately, Citigroup Inc. and Barclays Plc said the peso’s plunge could prompt another surprise rate increase after policy makers unexpectedly raised the benchmark in February outside of a regularly scheduled meeting.
The mounting speculation that Mexican authorities will be forced to act imminently to bolster the peso comes after the currency’s declines have accelerated this month, pushing it to a level that BNP says is at least 8 percent undervalued. The extra yield that investors demand to hold Mexican government peso debt rather than U.S. Treasuries has surged this month and the securities have lost 8.8 percent in dollar terms.
Still, as bad as May has been for bond investors in Mexico, it’s still considered a safe-haven for many drawn by the prospects of faster growth in Latin America’s second-biggest economy, which is expected to expand for a seventh year. Last month, Moody’s Investors Service reaffirmed the nation’s credit rating of A3, the seventh-highest investment grade.
Central bank Governor Agustin Carstens surprised the market on Feb. 17 by selling $2 billion directly to banks and unexpectedly increasing the key rate by 0.5 percentage point.
Since then, the bank has avoided tapping reserves to contain recent currency weakness.