MBono and UST curves remain flat/inverted as ongoing uncertainty regarding the future path of monetary conditions continues to weigh on the short end, while risks related to an economic downturn are anchoring the belly. Slopes will probably remain flat or inverted in the coming months in both curves. Meanwhile, the UMS curve has remained steep. The short end has been anchored by a lower supply of Mexican sovereign bonds, but we believe there is room for a flattening across all of the UMS curve that thus would catch up with other USD curves. We therefore see more value in the belly and long end of the UMS curve. Indeed, MBono/UMS spreads continue to decrease as MBonos have outperformed UMSs, albeit spreads at the short end (3Y-5Y) have remained high because of monetary policy expectations in the local curve. On the other hand, UMS/UST spreads from the belly to the long end have increased recently, but remain relatively stable as both USD curves have risen in tandem. In the 3Y sector, the risk premium decreased and is close to zero, which means that markets are not discounting any risk premium at the short end of the curve.
The SOFR basis have recently paused their upward trend on dwindling appetite for hedging MXN positions except at the very short end of the curve (3M-1Y). In this section, local rates implied in the MXN forwards curve have remained high because of monetary policy expectations, even if the MXN has remained stable in the spot market and continues to outperform its peers. From an issuer’s perspective, SOFR basis suggest a pause in hedging MXN debt, but their trend has been upwards.
UMS asset swap spreads against MBonos have increased from the 5Y tenor onwards despite the stability in SOFR basis. From an investor’s perspective, the UMS asset swaps look attractive with the exception of the 3Y tenor, in which the spread versus MBono is tighter. From an issuer’s perspective, sovereign USD asset swap rates to MXN continue to be expensive; therefore, it makes sense to issue debt in MXN instead of USD.