-
After years of a flat (or inverted) yield curve, Banxico’s easing cycle is finally impacting the level, slope, and curvature of local yield curves. The steepening of the curve seems to reflect the current monetary policy stance, together with a slightly higher liquidity premium. Meanwhile, the curvature appears to be driven by a pronounced convexity effect or reduced market liquidity. The overall curve level is trending downward, in line with the current balance of risks, as Banxico’s actions and macroeconomic factors—such as inflation and growth—guide yields toward a new interest rate regime.
-
Given the current shape of the local yield curve, what appears to be priced in, and our directional outlook, we reiterate our recommendation to receive in the 5-7 year sector, while maintaining an overweight position in Mbonos vs. other asset classes across all tenors.
-
The rise in Mexico’s sovereign risk premium partially explains the stickiness at the long end of the local yield curve and its pronounced steepening. Even though the sovereign premium has increased and UST yields have remained elevated, the compression in the Mbono spread has been sufficient to drive a rally in local yields.
-
With the curve expected to shift lower in level and steeper in slope, curvature trades (butterflies) are well-positioned to outperform, and the 5-year sector offers compelling value.
-
The carry between the 5-year and 7-year tenors is now positive and presents an attractive risk-reward opportunity, particularly as Banxico continues to cut the policy rate and the overall curve level declines. As Banxico continues its easing cycle, the local yield curve is expected to steepen further. Consequently, implied forward rates should begin to price in steeper slopes in the coming months. The 3-year/2-year vs. 5-year spread is likely to continue widening, indicating there is still room to receive spot rates versus forwards.
-
We estimate that the MBono yield curve will deliver a total return of 12.5% over the next six months. As we continue to anticipate further steepening, and with forwards already pricing in a firm policy easing path, we see room to receive rates in the 5- to 7-year sector.