Mexican Rate Spread: Tight vs. Central Bank's Rate Spread and Implications for Dis-inversion
Aa
Share
The Mexico 10yr rate spread to the US looks quite tight versus the central banks rate spread
Material and ongoing falls in Mexican inflation pushes in the same direction, with the fall in the headline rate from almost 9% to 5% facilitating the material falls seen in longer tenor market rates. As Mexican inflation falls and the policy rate rises and remains elevated, the result is a significant rise in real rates. The chart below shows the Banxico real rate alongside the Fed funds real rate (based off headline inflation). There is a 4% real rate differential in favour of Mexico. This is quite a comfort blanket. Recent MXN appreciation, in turn, is in part a manifestation of policy comfort built in real rates space.
The Banxico rate is well above inflation, a high implied real rate
One implication of this has been the evolution of quite a pronounced inversion of the 2/10yr curve. The US curve is extremely inversed. But the inversion on the MXN curve is even more pronounced. The big question is when are these curves set to materially dis-invert. The US curve is not quite ready yet, as the Fed continues to hike. But the MXN curve has enough front-end comfort to begin the dis-inversion process sooner. Typically it does not stray too far from the US curve, but this time we think it can.
