- While it seemed that inflation had peaked last November, recent events suggest that it may be stickier this year. The war in Ukraine is weighing heavily on the inflation risk balance as it has catapulted commodity prices. Additionally, a normalization of activity in Mexico due to the end of the fourth wave of the pandemic will most likely increase services consumption. Overall, our bias is that both headline and core inflation could end 2022 around 5% y/y.
- Considering our bias for inflation levels around 5% by year-end, and given ongoing volatility in global markets due to the Russia-Ukraine war, the recent sell-off in real rates and the possibility that Banxico keeps a hawkish stance, we see value in taking long Udibono directional positions.
- While carry levels are more attractive in nominal rates, in our view markets will most likely continue pricing in a more aggressive Banxico in the coming months, so another upward shift in nominal curves cannot be ruled out. In addition, expected returns seem appealing even if the Udibono curve remains relatively steady. We are recommending long positions in Udibono 2025 and Udibono 2050. While we also see value in the belly of the curve, we prefer nominal rates at these tenors since we continue expecting the curve to invert further.