Moody’s cut Mexico to Baa3, one notch above junk, yet 10-year MBono yields are 36bp lower than they were before the downgrade. Markets have remained calm about Mexico’s investment-grade status, while S&P continues to rate the sovereign three notches above junk. Mexico’s real yields are above 5%, second only to Brazil, which has supported demand for MBonos and Cetes as borrowing costs ease.
Rabobank expects Banxico to stay on hold at 6.50% and sees the 10-year yield stabilising around current levels. USD/MXN volatility has fallen as geopolitical risks and oil prices have normalised, and correlations have begun to fade as those pressures retreat. Even with weakening growth, sticky core inflation is expected to keep policy unchanged at 6.50% through year-end, with a high bar for further easing and a steady backdrop for carry.
Favorable Backdrop for Peso-Funded Carry Trades
We see the current environment as favorable for peso-funded carry trades. Mexico’s high real interest rates continue to attract significant capital, as evidenced by the $2.1 billion net inflow into MBono government bonds last month. This strong demand should provide a solid floor for the currency in the coming weeks.
The central bank, Banxico, is unlikely to lower its 6.50% policy rate in the near future, reinforcing the peso’s yield advantage. Sticky core inflation, with the latest June 2026 CPI print coming in at 4.7%, gives them little room to consider easing. We expect this hawkish stance to persist through the summer.
Opportunities and Risks in Market Dynamics
With USD/MXN 1-month implied volatility dropping below 11%, this presents an opportunity for derivative traders. We believe selling out-of-the-money USD calls or, equivalently, MXN puts is an attractive strategy to collect premium. This approach benefits from both the high interest rate differential and the expected stability of the currency pair.
We are not ignoring the signs of a slowing economy, such as the recent 0.2% month-over-month dip in the IGAE economic activity index. However, markets seem to be prioritizing yield over growth concerns, a pattern we also observed in the 2017-2018 cycle. The market’s muted reaction to credit downgrades confirms that carry remains the dominant theme for now.
