Banxico has suggested that the local context requires lower rates; nonetheless, it insists on keeping rates in restrictive territory. Some members of the Board argue that while the trade war could generate temporary inflationary pressures, these could be offset by economic slack. We expect Banxico to keep easing rates at a 50bp pace in the coming meetings. In line with this, the TIIE curve has shifted to the downside YtD and now incorporates a reference rate of approximately 7.5% by the December 2025 meeting. In our view, there is room for an adjustment towards a rate even below 7.5% and still in restrictive territory. Hence, we continue to see value all along the curve.
In terms of carry, considering a six-month horizon, levels remain negative from the 9M to 3Y but are near 10bp across the rest of the curve. Only the short section of the curve (below the 2Y tenor) remains inverted, so adding positions in the very short end seems more costly. While we think there is room for MP beyond what is currently priced in, the 3Y onwards seems a better fit for our bullish rates strategy.
Swap spreads have moved to negative territory in all tenors, which means that the TIIE curve is pricing in more rate cuts than the MBono curve. Swap spreads in tenors longer than 3Y keep registering historical lows and have exceeded 90bp from the 5Y onwards. We maintain a constructive stance on MBonos over TIIEs and expect swap spreads to normalise. We expect the main adjustment to focus on the 2Y-7Y section of the Mbono curve as the very front end of the TIIEs markets will continue to trade on near-term monetary policy expectations. Additionally, Mbono carry is positive and appealing in the front to belly area of the curve. More specifically, we recommend long MBono positions over TIIEs in the 5Y tenor, where swap spreads stand around historical lows (Section A of the below tables shows that the 5Y stands below the 0.3 percentile).
In line with our longstanding expectation, slopes continue to steepen, remaining negative only below the 3Y section. The slope between the short end and belly of the curve could continue to increase due to both monetary policy and risk premium. However, the carry cost of such a strategy stands around 20bp and the forward curve is pricing in a steepening of nearly 18bp. Hence, we are no longer adding steepeners at these levels. Butterfly spreads have also risen towards their historical median; in our view, there could be room for further adjustment in the shortest section.
Finally, TIIE FRAs are slightly below spot rates as markets continue to expect less restrictive monetary conditions. FRA spreads vs. spots in the shortest section remain negative (see Section F), and we see an opportunity to take advantage of the current distortion in the 3M/3M vs. the 6X1 and the 3M/6M vs. the 9X1, due to our more dovish monetary policy view. In the belly, forward rates are much higher than the spot level, which is in tandem with steepening expectations and, more importantly, a higher risk premium going forward.