Bond Woes Plague Mexico ETFs

Over the past week, the MSCI Mexico IMI 25/50 Index is stumbling and what is left of the index's 2019 gains is less than half the year-to-date returns of the MSCI Emerging Markets Index.

Bond market woes are plaguing Mexican equities and the related US-listed exchange traded funds.

What Happened

The Direxion Daily MSCI Mexico Bull 3X Shares MEXX, the lone leveraged Mexico ETF trading in the U.S., attempts to deliver triple the daily returns of the MSCI Mexico IMI 25/50 Index.

Entering Wednesday, MEXX was down 7.54 percent month-to-date, a loss exceeded by just six other Direxion leveraged bullish ETFs.

Why It's Important

MEXX has been seeing increased turnover as bond market observers fret about the state of Mexico's sovereign debt.

“Government-debt spreads are now higher than those paid by emerging markets rated two levels below Mexico’s BBB+,” reports Bloomberg.

The problem stems from rising debt loads at Pemex, Mexico's state-controlled oil company. No global oil major carries more debt than Pemex, according to Bloomberg. Pemex is not a member of the MSCI Mexico IMI 25/50 Index. In fact, the index features no energy stocks at all, but MEXX is reflecting investors' concerns about Mexico's credit rating.

For the five-day period ended Tuesday, Feb. 12^th, MEXX's volume was more than 103 percent above the trailing 20-day average, according to Direxion data. Just one other of Direxion's leveraged ETFs had a greater increase in volume over those five days.

What's Next

Activity in MEXX could continue increasing if bond traders price in more strain on Mexico's credit rating, which is a distinct possibility.

Seventy percent of those polled in a Bank of America Merrill Lynch survey expect Mexico will lose its investment-grade rating in the coming years, according to Bloomberg.

Ten-year Mexican bonds yield 8.45 percent, still well below the all-time high of 12.24 percent seen in 2001, but 100 basis points above where those yields were in late February 2018.

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