Petróleos Fixed Income Analysis

Now, while we believe there’s potential for upside given the trading dynamic of the Company, we must also note that our current view on the fixed income space is skewed towards shorter duration instruments. The reason for this is directly linked to the current bout of global inflation, as evidenced by the latest US CPI reading (February 2022) of 7.9%, its highest level since January 1982. This has been a worldwide occurrence with developed and developing nations reporting record-high inflation levels. This has therefore meant that there is a pivot by global central banks to more contractionary monetary which has then led to higher interest rates in many cases. The market has subsequently reacted with US ten-year yields at 2.71% as of April 8, 2022, up 107.4 bps YOY (Year Over Year). Since we remain in this hiking cycle, further rate increases are likely which has negative implications for bond prices and further reinforces our preference for shorter duration instruments.

In addition to the above, we recognize that there is heightened political risk associated with Mexico, and by extension, PEMEX. This is inclusive of the possibility of a new political party coming into power post-2024 that might take a different policy stance as it relates to PEMEX. This would change the Company’s credit standing (Despite data suggesting that the current ruling party retains favorable standing amongst the populace, no formal declaration or plans for PEMEX beyond 2024 as it relates to the possibility of government support have been announced).

Now, while this is our preference, we note that the recommended bond is a 2032 maturity with a modified duration of 6.803. Given the tenor of the bond, we believe the duration is favorable. However, more importantly, PEMEX has swapped the majority of its shorter tenor bonds for longer tenor bonds, most notably, this PEMEX 2032 6.70%, with a yield to worst of 7.88%. Given the attractive yield, relatively favorable duration, and the potential for price appreciation while considering the significant risks associated with the bond, we’ve issued an OVERWEIGHT recommendation but note that this is directed at clients with AGGRESSIVE tolerance and a large capacity for taking such risks.