¡Órale, Banxico! Mexico's Hiking Cycle is Over

They say if you don't say good things about yourself, nobody else will.

"Another 25bp hike at next week’s Banxico meeting looks baked in. The fundamentals argue that could be the end of the hiking cycle--usually that’s a good time to receive rates...Receive 2-5yr TIIE or buy 3--7yr Mbonos; curve is flat, but not yet pricing an easing cycle." -"Make Mbonos Great Again", 6/15/16

"With the entire TIIE curve gravitating around the 7% level, we might see another 50bp move lower if the market buys into the easing cycle. The 2-5yr segment is the sweet spot of the curve, specifically the 1y rate, 2yrs fwd, which is hanging around 6.80%..."What I Think About When I Think About Mexican Rates", 6/21/17

One week...one 25bp hike...one dovish Banxico statement...rates 40bps lower, and 50bps in the 2y1y--the 2-3yr tenors outperformed, presumably on the assumption Banxico wouldn't be afraid to cut before the election, but that it will be "all systems go" once the election is over.


Image result for banxico meme
"With the resignation of Carstens at Banxico, is it time for us to panic?"
"Kent, I would say yes." 

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June 27, 2017 at 7:20 PM ×

You crushed it. Where would you think about taking off the trade (and why)?

Looking like a well-timed exit from duration longs by Leftback. Draghi: “... as the economy continues to recover, a constant policy stance will become more accommodative, and that the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged.” So (as JPM points out), "he does not obviously regard tapering as a tightening of policy." That would be SO Draghi. You know, "tapering" but saying it's "not tightening," just as he reduce the QE purchase rate from 80b to 60b, but said it wasn't "tapering." Got short buxl again today.

On my mind ... the Fed is going to start shrinking its balance sheet, the ECB is going to taper (if not because of inflation, because of issuer limits in 2018), and the BoJ is stealth tapering. So, how to position medium-term? I'm not convinced "term premium" needs to re-price (I know I shorted buxl, but that's a trade). MM wrote a great piece for BBG some time ago challenging the ACM term premium, suggesting the long-end was more driven by expectations of short rates in the long-run (proxied by the OIS curve). I've also seen analysis suggesting term premium has already re-priced in the US. Ambiguous.

But consider those who were selling sovereign bonds into QE. What did they do with the proceeds? Buy bitcoin? No. They bought the next safest thing, IG debt. Now there's going to be more safe asset available, so demand for IG should be less. Zerohedge had an excerpt from a chart in a Citi presentation showing the YoY change in global central bank balance sheets and the change in CDX IG. Good fit. So, that IG should widen makes logical and empirical sense to me. What is the best way to express this view. Shawn? Pay CDX IG? Options? Vol is low but longest expiration I'm quoted goes to Jan '18. Is there a tranche trade, or a curve trade (Citi recommends 3s5s CDX IG flattener)? I'd really appreciate feedback, if anyone has it. Oh, one other point -- credit spreads start widening before equities top out, historically. Another reason to look at credit to play central bank balance sheets (instead of equities).

June 28, 2017 at 4:08 AM ×

Yeah, Johno that seems astute. Sure, it makes sense to bail out of IG, USTs and bunds here and wait for the right moment to re-enter USTs when it all finally starts to go pear-shaped. We are about 80% out of duration, been winding this down for a week already now.

June 28, 2017 at 4:37 AM ×

Thanks Johno...Given the way the market reacted to the Banxico statement and more or less "got with the program", this is a classic regime change. The easy money is done...it would be nuts not to take profit and re-evaluate the "new normal". I think there could be some room to run but philosophically I think you have to step back and re-build the thesis around the new level of breakevens (around the 3.50% level I mentioned) and the correlation/performance vs. MXN and other EM risk assets--the core thesis of my first piece was how local rates have lagged every other Mex (and EM!) risk asset. Now rates have closed much (but not all) of that gap.

Re: duration at large....yes, great call by leftback in the long end, and didn't someone recommend buying EUR gamma and selling eonia greens a couple of days ago?!? That's good for a clean single to right field on both counts. The short EUR rates trade has room to run.

Re: Term premium--this has been a popular topic lately, I was hoping to get a short post out about it this week but it will probably drag into next week. Not having read his piece, I would agree with MM that models are problematic and economists often try to quantify term premium when it is, in some sense, an error term.

Re: QE unwind--central bankers are still going to blow bubbles...QE was the enabler not only for a ton of IG buying/spread compression but also issuance. It will take a credit scare for IG to take a big plunge. Per your last point, there's no shortage of ways to get short IG outright, in options...I dunno, I'm sure you're friendly neighborhood JP Morgan salesman will arrange something for you at very fair price...Maybe don't out-think it and buy calls on the VIX....cheap, easy...And without having seen the presentation, I'd say citi recommends a 3s5s CDX IG flattener because it involves a ton of sales credits.

June 29, 2017 at 6:38 PM ×

Quiet here. Guess we all shorted FANG but are keeping silent so as not to wake up the trolls ;)

Thank you for the feedback on IG, Shawn. Agree it's hard to see IG short beating the negative carry unless we get a scare.