Beyond the last cut from Banxico (August 8), local curves have shown a downward adjustment over the last month. The TIIE curve is incorporating a reference rate of approximately 10.52% by the December meeting, which suggests only a cut for the rest of the year. In our view, the CB has left the door open for more cuts. In Banxico’s quarterly report (August 28), the majority of the Board highlighted the continuous convergence of core inflation, the improvement in the inflation balance of risks, and the fact that real rates remain quite restrictive. Overall, they downplayed the recent depreciation of the currency. Thus, in our view, the CB has left the door open for further cuts. Hence, we see room for a 75bp cut during the rest of the year. The potential for cuts in the US also supports a more dovish Banxico than what the curve is pricing. Hence, we maintain our positive view of local rates overall.
Note that carry cost is still expensive all along the nominal curve, especially in the short tenors (until the 5Y section). Since Banxico has signalled that the easing cycle will be gradual and rates will remain high, the scenario will most likely continue to be challenging in terms of carry.
The TIIE curve is again pricing a more dovish scenario compared to Mbonos; therefore, swap spreads for most tenors have reached 2024-lows. In our view, MBonos could outperform TIIEs once Banxico moves on with the easing policy in a clear manner and hence, we remain constructive on MBonos over TIIEs. We continue to expect the main adjustment to be focused on the 3Y-7Y section, but in relative terms, MBonos are much more attractive than TIIEs in the belly and long end of the curve.
Slopes have maintained a positive trend for several months though they remain negative. We continue to see value in a steepening strategy, even considering the cost, particularly due to our expectation of an ongoing easing cycle ahead. The carry cost of a steepening strategy in the 2Y/10Y TIIE slope over the next six months is c.20bp and the forward curve incorporates a steepening of 50bp in the following 6M. Since we expect the curve to steepen more than the carry cost, we think the timing for steepeners has arrived.
Lastly, TIIE FRAs are still below spot rates because markets continue to expect less restrictive monetary conditions. FRAs spreads vs. spot are currently negative, so there is still an opportunity to take advantage of the current distortion. Since last year, we have identified relative value in the 2/5Y vs. 5Y section. While in this tenor the spread has narrowed, we maintain our view that it will increase further. Therefore, we still see value in receiving spot vs. forward.