- In this document, we analyse the carry and duration effect in the nominal curve in a context of recent volatility and higher funding costs.
- With the recent increase in yields, the duration effect translated into additional losses at the belly and long end. Therefore, decreasing exposure to duration has been a better strategy. Going forward, we maintain our preference for the short end in Mbonos (2Y-5Y section). We acknowledge that the carry cost is still expensive along the Mbono curve, and in this scenario of higher rates for longer, the curve still faces a challenging context. However, even considering the carry cost, the short end of the nominal curve continues to be a better strategy than adding duration.
- In addition, given our more dovish view for Banxico than the market is currently pricing, 6M and 1Y Cetes continue to be appealing; moreover, we also see value in receiving the 9X1 and 13X1 TIIEs as we expect more cuts in 2024 than is currently implied.
- Over the last month, nominal curves have increased nearly 60bp on average on the FOMC’s “higher for longer” stance and Banxico’s still hawkish message. In this tough environment, it is key to identify the section of the curve that has outperformed. Overall, steepening strategies have performed better despite being costly.
- Since March, we have been recommending the short end of the curve vs. the belly and long end. From March to date and YtD, short-end MBonos performed better than the rest, in line with our expectations, despite the recent selloff. Nonetheless, due to funding costs, returns all along the curve have been negative.