Home Argentina Foreign Investors Keep Buying Colombia’s Local Bonds While Reducing Mexico and Peru Exposure, Morgan Stanley Says

Foreign Investors Keep Buying Colombia’s Local Bonds While Reducing Mexico and Peru Exposure, Morgan Stanley Says

Foreign Investors Keep Buying Colombia’s Local Bonds While Reducing Mexico and Peru Exposure, Morgan Stanley Says
South America viewed from space with sunrise on planet Earth and stars, overview of Amazon river and forest, night lights from cities in Brazil, Argentina, Chile, Peru, map elements from NASA. Adobe Stock.

NEW YORK — Foreign institutions and individuals continue adding positions in Colombia’s local government bonds this year, representing the only Latin American country still winning the favor of international fixed-income investors, according to data compiled by investment bank Morgan Stanley.

“Foreign ownership continues to fall in Mexico and Peru, while in Colombia foreign inflows continue,” a group of seven analysts wrote in report reviewing how foreigners are allocating positions year-to-date not only in the region but across the world’s largest local emerging markets. At the same time, Chile and Brazil are showing signs of stabilization of foreign ownership inflows, according to the 36-page document.

The interest of international investors on local government bonds tends to send a clear message to policymakers as bigger inflows tacitly endorse market-friendly policies and auspicious economic outlook.

By contrast, Latin America’s local pension funds “continue to reduce their local bond holdings in most countries” of the region, being Mexico the exception as pension ownership “continues to trend higher,” analysts including Belle Chang, James K. Lord and Andres Jaime said in the report by the New York-based investment bank.

Source: Morgan Stanley report: Who Owns EM Local Government Bonds?, October 5.

Since the end of March foreign investors have continued to boost their share of Colombia’s local debt holdings to 26% from 24%, but at the same time, the nation’s pension funds have seen the most notable decline taking their participation to 27.5% from 29.3%, the report published on October 5 said.

The nation’s central bank, Banco de la Republica or BanRep, “has also seen a notable increase in government bond holdings, increasing its share of local debt holdings from 3.5% of the total stock to 5.25% as of the end of August,” according to the report.
As an example, net inflows surged to an unprecedented 10.8 trillion pesos or USD2.8 billion in the three months through June, a full 30% above the previous quarterly high set in 2016, Bloomberg reported in July.

Colombia was downgraded to “junk” status by S&P Global in May and by Fitch Ratings in July, losing its investment grade category. In contrast, Moody’s Investors Service on Wednesday maintained Colombia’s credit rating at BAA2 and improved its economic outlook from “negative” to “stable”, saying government fiscal measures and post-pandemic recovery will stabilize its debt, according to Reuters.

Brazil and Chile

Brazil’s foreign ownership “remain relatively steady among most market participants”. In Latin America’s largest economy local banks ownership remained steady at 22.3% between the end of March and July, concentrated in LFTs and LTNs (floating-rate and short-term bills). Foreign investor ownership remained at 7%, with much of the ownership concentrated in short-term bills and NTN-Fs, or nominal fixed-rate bonds, according to the report. Year- to-date net inflows from foreign investors stand at USD10.8 billion, while local banks bought a net USD31 billion worth of local currency debt.

In Chile, amid pension withdrawals throughout last year and this one, pension fund local debt ownership has continued to decline from 53.2% at the end of March to 43.7% as of the end of July. The equivalent of USD6 billion of pension fund outflows from local debt. Foreign investors have seen a slight recovery since March, with inflows at ~USD1.4 billion, bringing ownership up from 12.65% to 14.33%, according to the report.

Uncertainty in Mexico and Peru

Peruvian local banks “have continued to be the main funding source of the local government as foreign inflows have suffered due to high policy uncertainty post the 2021 presidential elections,” the analysts note in the report. Local banks now own 28.3% of the local debt market, up from 23.2% at the end of March, their highest level of ownership since 2007.

Foreigners own 47.8% of Peru’s local government bonds, down from 49.7%, but still within the historical range seen between 2012 and 2021 while pension funds have also seen their local holdings decline from 16.8% to 13.5%, remaining at all-time lows in pension ownership, the analysts wrote.

In the case of Mexico, foreign investors have had net outflows of close to USD10.9 billion, mostly from Mbonos (~USD9.8 billion), while Udibonos have seen the largest foreign inflows, of almost USD1 billion, according to the report. Local banks have maintained much of the ownership they built up in 2020, staying almost flat at 16.45% relative to December 31, 2020.

Source: Morgan Stanley.

Mexico’s domestic pension and mutual funds continue to experience “notable increases in ownership as they have also been the largest contributors to net inflows to local debt in 2021,” with USD20.8 billion of net inflows, the report said.

According to the most recent estimates by Bank of America, issued on September 22, Colombia’s gross domestic product is projected to expand 7.5% this year while Brazil’s economy will grow 5.2% vs 6% in the case of Mexico. Peru’s GDP is expected to expand 12.5% and Chile another 9.5%. As a whole, Latin America’s GDP will increase 6.5% this year after the 6.9% recession suffered in 2020.


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