- The TIIE/MBonos spreads (swap spreads) have declined significantly in recent years, and some tenors have been negative since June. Although the TIIE/MBono spread is typically positive, as TIIEs’ banking system risk is referenced to TIIE28, while MBonos represent government risk, this has not been the case so far in 2022.
- This is partly due to some structural changes in the MBono and TIIE markets, with the latter seeing higher liquidity. The average traded volume in TIIEs has increased significantly, and so far in 2022 it has exceeded that of MBonos.
- This has happened on previous occasions, as a similar dynamic was seen from 2015 to 2017, when the increase in average traded volume in TIIEs was also complemented by a reduction in swap spreads. In addition, this higher average traded volume in TIIEs has coincided with Banxico’s restrictive cycles, and this is where we are today. Indeed, the average trading volume in both cycles was concentrated on the very short section of the curve (between 1M and 1Y), which suggests that the higher traded volume in TIIEs is related to the more dynamic trading of monetary policy expectations.
- When we look at liquidity measures by participant, foreign investors account for most of the recent dynamic in the average traded volume of TIIEs. This is important to look at as in the last two years foreigners have reduced their positions in MBonos, especially in the short section of the curve, although they have increased their duration in MBonos. Foreigners’ increased duration in MBonos over recent years, coupled with the fact they have switched to TIIEs, shows that the risk premium is not necessarily the main driver of these flows (as opposed to common knowledge) and that the view of Mexico remains relatively stable.
- The shift from MBonos to TIIEs may also reflect the fact that real money accounts have become more directional when allocating their positions, hence the outflows from the short end of the MBono curve and the increase in duration. However, the higher average traded volume in TIIEs, especially at the short end, may be a clue as to structural changes in the market and suggests more of an appetite for fast money accounts in the swap market.
- Going forward, due to the prevailing uncertainty regarding monetary policy, the average volume traded in TIIEs will probably remain high and swap spreads will remain tight. As, in our opinion, we are nearing the end of the tightening cycle, this dynamic could change. However, we would only expect a reversal in the mid to long term.