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Morgan Stanley Continue To Favour Receivers In Belly Of TIIE Curve

MEXICO
  • Morgan Stanley economists expect Banxico to deliver a 25bp hike. While the February decision in itself will likely be a non-event, investors will likely be keeping a very close eye on the statement for any additional colour on the outlook for further hikes.
  • In addition, the vote split will also be in focus, given the new Banxico board appointment and the market's attempt to gauge its monetary policy views.
  • MS continue to favour receivers in the belly of the TIIE curve (the 5-year sector). However, they stick with their 8.10% target and are not looking to extend it for now, as MS expect further gains to remain somewhat bumpy and data-dependent.
  • In fact, to the extent that the latest batch of US data (NFPs, ISM) trigger some premia repricing in FOMC terminal rate expectations towards 5.25%, MS would expect a pullback in priced-in expectations for Mexico's upcoming easing cycle as well (currently still priced to start in September).
  • MS would expect more limited pressure on the belly of the TIIE curve, as some of the cuts would likely be pushed further down the curve, rather than completely removed. However, as roughly three-quarters of the ~400bp of priced-in cuts are currently concentrated in the 1y1y, MS see attractive risk/reward in 1y1y TIIE payers as a broader hedge against a potential correction in US front-end rates, particularly given attractive carry/roll (~55bp over three months).
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