In its November meeting, Banxico cut the reference rate by 25bp. However, the forward guidance for December was adjusted. The Board refrained from signalling multiple cuts and instead only acknowledged the possibility of further easing. In this context, we expect Banxico to reduce the policy rate by 25bp at the upcoming meeting on 18 December. Nonetheless, the central bank appears to be approaching the end of its easing cycle. In our view, the terminal rate will likely reach around 6.5% in 2026.
Despite this outlook, the TIIE curve continues to price rates above 6.75% over a 6M horizon, suggesting room for downward adjustment. As such, we continue to identify value across the curve.
Carry conditions have continued to improve across most of the curve. Over a 6m horizon, the carry from the 26X1 onwards remains positive, on average 12bp. This segment looks especially attractive given our constructive stance on rates. In contrast, only the very front end remains slightly negative, with a carry of -4bp in the 9X1. Moreover, curve inversion is now confined to tenors shorter than 1Y.
Swap spreads remain negative along the curve, indicating that TIIE is still pricing in more easing than the MBono curve. Although spreads have narrowed somewhat, they remain below the 10th percentile from the 26X1 onwards and exceed 60bp from the 39X1 (see Section A). While we do not expect spreads to turn positive in the short term, a gradual correction toward less negative levels seems likely. In particular, we see room for the 5Y swap spread to increase in the coming months, as MBonos have historically outperformed TIIEs in the final stage of Banxico’s easing cycle.
As the cycle has progressed, curve slopes have continued to steepen—even the 1Y/2Y is now marginally positive (around 8bp). The 2Y/10Y slope has also increased, reaching its median (currently at the 48th percentile). Although the final phase of the easing cycle is still ahead, the recent steepening appears somewhat overdone; therefore, this slope is likely to stabilize going forward. In fact, the current levels offer an attractive entry point to position for a re-flattening—specifically through the 1Y/1Y TIIE-F vs. the 10Y MBono.
Finally, TIIE 3M and 6M FRAs remain below spot rates in the sub-1Y segment, reflecting expectations for additional easing. While short-term spreads (see Section F) have narrowed since our last publication, further adjustment appears likely—particularly between the 3M/3M vs. 6X1, and the 3M/6M vs. 9X1. In longer maturities, the 5Y/5Y remains nearly 80bp above the 10Y, suggesting room for downward repricing. Forward rates in the belly, now closer to spot levels, reinforce the case for curve re-flattening.