Once markets overcame the sell-off triggered by the local elections, the TIIE curve shifted downwards. This relief rally preceded Banxico’s decision this week to keep its monetary policy rate unchanged at 11.0%, in line with expectations. While the communiqué highlighted the recent volatility in local assets and in the MXN as a response to local idiosyncratic factors, it also showed a main change by highlighting weaker economic activity. The forward guidance left the door wide open for upcoming actions, depending on economic data, as it signalled the risks of activity and conviction on the inflationary outlook. The TIIE curve is currently pricing a year-end rate of 10.75%, in contrast to the 50bp cut priced just one month ago. Since our bias is less hawkish, we maintain our positive view of local rates, overall.
Note that carry cost is still expensive all along the nominal curve, albeit especially in the short and belly tenors (until the 5Y section). Since the easing cycle will be gradual and rates will remain high, the scenario should continue to be challenging in terms of carry.
The recent underperformance of swaps versus sovereigns led to higher swap spreads from recent lows, which nevertheless kept almost all the tenors in negative territory. In our view, MBonos should outperform TIIEs and hence we remain constructive on MBonos over TIIEs. In particular, we continue to expect an upward movement focused on the 5Y-7Y section.
Slopes have increased from the 10Y minimums observed some months ago. While the slope may take time to normalise, we continue to expect a steepening. The neutral carry cost of a steepening strategy in the 2Y/10Y TIIE slope over the next six months has reduced further to 36bp. This is because the forward curve has moved to incorporate less than 5bp steepening in the following six months.
Lastly, TIIE FRAs are still below spot rates because markets are anticipating a less restrictive monetary stance. Spreads are currently negative, so there is still scope to take advantage of the current distortion. Since September, we have recognised relative value in the 2-5Y section. In line with our view, the spreads have narrowed over the last few months, but for the moment we still see value.