As in other emerging markets, a major transmission mechanism of imported monetary easing has been substantial capital flows into the country, driven by the search for yield in equity and fixed income assets. Especially significant have been flows directed to peso-denominated government bonds. Mexico has been attracting an increasing proportion of total capital inflows devoted to emerging-market local bonds.
Currently, in Mexico, close to half of all peso-denominated public debt securities with fixed coupons are held by foreign investors. Factors behind the portfolio inflows may include Mexico’s macroeconomic stability, capital account openness, a freely floating exchange-rate regime, and high liquidity enjoyed by the Mexican peso in FX markets.