Rabobank strategists Christian Lawrence and Molly Schwartz note that despite Moody’s downgrade of Mexico to Baa3, 10-year MBono yields have fallen and markets remain relaxed about Mexico’s investment-grade status. They highlight Mexico’s high real yields, Banxico’s likely hold at 6.50%, fading correlations, subdued USD/MXN volatility, constructive positioning and limited reliance on July seasonals.

Carry supports stable peso

“Despite Moody’s cutting Mexico to Baa3 (one notch above junk), 10-year MBono yields are 36bp lower than before the downgrade. Markets appear unconcerned about a near-term loss of investment-grade status, with S&P still rating Mexico three notches above junk.”

“Mexico continues to benefit from some of the highest real yields globally (>5%), second only to Brazil, supporting demand for MBonos and Cetes. We expect Banxico to remain on hold at 6.50% and the 10-year yield to stabilize around current levels.”

“Correlations are beginning to fade as geopolitical tensions and energy prices retreat, but MXN’s attractive carry profile should continue to support its inverse relationship with volatility in the near term.”

“USD/MXN volatility has fallen as geopolitical risks and oil prices have normalized, reinforcing the attractiveness of MXN carry trades and supporting a stable FX backdrop.”

“Despite weakening growth, sticky core inflation should keep Banxico on hold at 6.50% through year-end, with the bar for further policy easing remaining high.”

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