This week, local curves have experienced a relief rally, partially reversing the increase caused by inflation data. The TIIE curve is incorporating a reference rate of approximately 10.47% in the next six months, in line with our expectation of probably two cuts in the remainder of the year. Although the next decision for Banxico could be close and with a fairly divided Board, we consider there is still a possibility that the Board will cut rates by 25bp at the August meeting, which would be consistent with the communication from the last meeting. This decision could be justified by the moderation in core inflation since the recent increase is entirely driven by non-core components, besides the ongoing economic slowdown. Hence, 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 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 underperformance of swaps versus sovereigns has 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 3Y-7Y section.
Slopes have maintained a positive trend for several months, though they remain negative. While it may take longer to normalise, we continue to expect a steepening. However, the carry cost of a steepening strategy in the 2Y-10Y TIIE slope over the next six months has increased to 44bp. This is because the forward curve incorporates a steepening of 37bp in the following 6M.
Lastly, TIIE FRAs are still below spot rates because markets continue to expect less restrictive monetary conditions. FRA spreads vs. spot are currently negative, so there is still an opportunity to take advantage of the current distortion. Since September, 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.