The Mexican Curve: Deeper Inversion Than the US, Signaling Turning Points Ahead

The Mexican curve is consequently heavily inverted, even deeper than the US one

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When we look for directional turning points we like to take note of the positioning of the 5yr on the curve through the 2/5/10yr butterfly. This is essentially where the 5yr rate sits versus an interpolation between the 2yr and the 10yr. Currently the 5yr is exceptionally rich, mostly reflecting a deep inversion on the 2/5yr segment. When the curve dis-inverts, the bulk of it will happen on this segment, correlating with a de-richening of the 5yr to the curve. Right now it looks like the 2/5/10yr has topped out, and there is room for a bigger movement on the MXN curve (than on the USD curve).

 

Changes in curve trends tend to be quite synchronized between MXN and USD, but as the cycle turns ahead the MXN curve can lead the dis-inversion process. Right now, dis-inversion strategies are a pain trade from a carry a roll perspective. In the next 6 months there’s a 40bp carry and rolldown cost to 2/5yr MXN steepeners and 85bp for 2/10yr MXN steepeners.

Generically from here we like dis-inversion trades. But we’d prefer to set them with more conviction once the Fed has actually peaked. That said, the cushion here is the MXN curve which is really primed to dis-invert with some aggression, likely ahead of and more dramatically than the US curve will.