While Banxico, as the nation’s central bank is known, last week signaled a slowdown in the pace of rate hikes, analysts at banks including Barclays Capital Inc. and Bank of America say it’s still too early to add. receiving positions, which benefit from a drop in swap rates.
The global inflation outlook and Federal Reserve policy projections will be catalysts that will become more important, they say, and for now they still point to higher rates for longer.
In fact, movements in Mexican swap rates and US Treasury yields have not been that connected since the early days of the COVID pandemic.
The 50-day moving correlation between two-year TIIE rates and US swap rates as of the same date has risen above 0.75, the highest since March 2020. As the Fed is expected to raise rates in another 130 basis points this year, Mexican rates may not come down soon.
“In the short term I would remain cautious. The global ones clearly matter, as the Fed will be one of the main factors,” said Claudia Ceja, a strategist at BBVA in Mexico City. “Although the market already anticipates strong increases, any inflationary surprise can lead it to anticipate a more restrictive stance, even if it does not materialize.”
Mexico’s central bank on Thursday raised its policy rate by 75 basis points to 8.5%, as expected, and signaled a smaller increase for September. The swap rate curve discounts less than 100 basis points of additional rate hikes in 2022 before central bankers pause, and implies an 8% rate by the end of 2023.
“The market is still pricing in too many cuts too quickly,” Bank of America strategists led by Claudio Irigoyen wrote in a research report on Friday. The uncertain global environment may force Latin American central banks to “keep rates high for longer.”
BofA recommends paying rates in Mexico (1-year TIIE rates from August 2023 versus US swap rates) and says that Banxico is unlikely to allow the nation’s rate spread vis-à-vis the fed funds to shrink by the short term in light of Mexico’s own inflation problems and central bankers’ preference for a strong peso.
It is the opposite of what is happening in Brazil, where mid-curve swap rates have plunged more than 70 basis points since the central bank signaled that the tightening cycle is nearing its end. Signals from central bankers triggered a run on receiving rates.
“For now the external drivers are more important, especially the US inflation data that surprised on the downside. That is what is creating a better environment for receivers,” said Erick Martínez, strategist at Barclays in Mexico City. Banxico’s decision, for its part, “is not an additional boost to receive.”