Banxico hawkish risk raises bet on curve flattening swaps

(Bloomberg) — Rate swap traders are looking for more curve flattening in Mexico as pressure mounts on the central bank to step up its fight against inflation.

A tighter tone from policymakers on Thursday could fuel a hike in TIIE rate swaps at the short end, pushing the spread between 2-year and 10-year rates even deeper into territory. negative. While the central bank is widely expected to raise the benchmark rate by another 50 basis points to 7%, traders are eager to see if any of the board members will vote for a bigger hike.

Banxico, as the central bank is known, has become an outlier among major Latin American economies, where rate hikes of a full percentage point have become the norm. Over the past month, Brazil, Colombia and Chile have raised rates by at least 100 basis points, as consumer prices beat forecasts and expectations for the Federal Reserve tightened.

“The curve is not pricing in any significant chance of an increase in the pace of hikes to 75 basis points in the near term,” Morgan Stanley analysts including Ioana Zamfir and Gilberto Hernández-Gómez wrote in a May 8 report. . «Risks are skewed toward higher anticipated increases should the vote split change.»

Mexico’s two-year swap rate was trading at around 8.98% on Tuesday, while the 10-year rate was at 8.90%. At the end of April, when the market priced in over a 50% chance of three 75 basis point hikes in May, June and August, the swap spread fell to -46 basis points. Since then, the curve has flattened as traders reduced bets on more aggressive monetary tightening and now implies around 260 basis points of hikes by the end of the year, with six central bank meetings scheduled.

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A split vote on Banxico’s rate decision this week may reignite speculation that the central bank will eventually speed up the pace of tightening to 75 basis points, which would be the biggest increase since the interbank rate was targeted at a day in 2008. Annual inflation in Mexico accelerated slightly less than expected in April, but remained at a 21-year high.

“A couple of board members might see the continued acceleration in inflation as an additional element to justify a 75 basis point increase,” Citigroup Inc. strategists, including Dirk Willer, wrote in a report Monday.

original note:

Hawkish Banxico Tilt Risks Fueling Bets on Swap Curve Flattening

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