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BBVA Say Continued Disinflation Suggests Value in Long-End Breakevens

MEXICO
  • Against the backdrop of continued disinflation, BBVA note the value offered in long-end breakevens in Mexico today. They state that while their preference for long-term Udibonos remains intact, the current breakeven level offers more value in nominal rates vs. real rates in the belly and long end of the curve.
  • As a result, BBVA see further adjustment in the 10-year and 20-year tenors, given their expectations for further disinflation ahead. They recommend taking long MBono positions against short Udibonos, notably in the 10-year area, where the cost of carry is low.
    • Inflation has already fallen sharply last year, with the headline rate moving from 7.9% to 4.66%, and BBVA expect inflation to end this year at 3.5%.
    • BBVA note that inflation expectations, as measured by breakevens, have already adjusted at the short end, but have increased at the long end in recent weeks.
    • Although nominal curves have moved significantly downwards since 4Q23, BBVA suggest that the recent adjustment in nominal and real curves has resulted in an upward shift in implied breakeven inflation, which they do not believe is in line with the inflation outlook.
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