Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 60
THE DRUMMER'S EAR | RHYTHMIC REASONING
spreads tighter which also helped attract primary new issue supply.
Investment grade (IG) and high yield (HY) spreads are currently
trading well below the April highs and back through long-term
averages, into overbought territory. Every credit valuation currently
shows multi-decade lows which suggests that corporate bonds are
likely due for a correction back to the long-term average.
We anticipate the U.S. employment picture to deteriorate further,
which should support investment flows into bonds. Monetary
policy supports the front end of the curve which could later
extend further out the yield curve. A possible correction in credit
spreads wider to long-term averages could also underpin a bid
for Treasuries. Our forecast calls for lower rates in the U.S. over
the next 12 months. We are positioned long duration relative
to corresponding benchmarks to take advantage of yield curves
potentially shifting lower. On credit, we continue to favour higher
quality investment grade credit (‘A’-rated and above) over high
yield, preferably in the short-to medium part of the yield curve.
MEXICO: NAVIGATING CONFLICTING FORCES
The global financial landscape is currently shaped by two
opposing forces that introduce significant uncertainty into asset
performance projections. Across many countries, economic
growth is forecasted to be sluggish into 2026, which supports
the view that central banks and most notably the U.S. Federal
Reserve, will retain flexibility to continue lowering interest rates.
The second force is the inflation trajectory. Although inflation
has moderated over the past 12 months, persistent pressures
across various components on the services side compel monetary
authorities to proceed cautiously when adjusting interest rates. A
third factor are fiscal balances and the risks ahead.
In Mexico, fixed-rate bonds have gained strong traction throughout
2025. The yield curve has shifted downward in response to
continued rate cuts guidance from Banco de Mexico (Banxico)
regarding its monetary rate path. Unlike the U.S., Mexico
implemented rate cuts at a faster pace. It is worth noting that the
peak policy rate of 11.25%, maintained from March 2023 to March
2024, reflected a highly restrictive monetary stance. This provided
the central bank with greater confidence to execute rate reductions
in 2024 and 2025, bringing the benchmark rate to its current level
of 7.50%. In essence, Banxico had more room to maneuver in
preparation for a potential economic deceleration. We continue to
believe that the central bank’s focus will shift toward the economic
dynamics expected in 2026, assuming inflation remains within the
target range of 3% ± 1% and avoids upside surprises as seen in prior
years.
The apparent shift in the FOMC’s stance toward a more dovish
tone reinforces the outlook for continued rate cuts in Mexico.
Looking ahead to 2026, a key question for market participants is
whether there is limited and moderate room for further easing, or
if expectations are misaligned with what could be a second phase
of consecutive rate reductions, potentially reigniting demand for
fixed-rate bonds.
While monetary policy seems to be reaching an optimal level,
challenges on Mexico’s fiscal side remain. The government’s
budget deficit projection of 4.3% of GDP remains elevated
compared to the historical average of the past decade
(~2.5%), reflecting persistent structural imbalances. Despite the
government’s ambitious assumptions in the latest Federal Budget
for 2026, investor concerns persist over the credibility of these
estimates. Fiscal consolidation appears increasingly difficult,
especially in the absence of major tax reforms, rising social
spending pressures and limited economic growth. The interplay
between monetary and fiscal policy will be critical in shaping
Mexico’s macroeconomic stability and investor confidence heading
into 2026.
Fig. 3: Mexico Federal Budget 2026:
Economic Forecasts
Indicator
Expected
Latest
2024
2025
2026
GDP YoY
0.36%
(0.5% - 1.5%)
(1.8% - 2.8%)
Headline CPI YoY
4.21%
3.80%
3.00%
Monetary Policy Rate
10.00%
7.25%
6.00%
Implied Real Rate
5.56%
3.32%
2.91%
Public Debt
51.40%
52.30%
52.30%
Public Budget Balance
-5.70%
-4.30%
-4.10%
Source: Mexican Federal Agency, Scotia Wealth Management
While inflation remains a key variable, the current trajectory
suggests a cautious but consistent normalization of policy, aimed
at supporting domestic demand without compromising price
stability. Investors should monitor inflation dynamics and Fed
policy signals closely, as they remain critical to the pace and scope
of future adjustments.
On the trade front, during 2025, the U.S. implemented tariff
increases across global partners. Mexico has largely avoided major
changes, but early signs of adjustment are emerging with the
renegotiation of the USMCA. These developments could reshape
trade dynamics and introduce uncertainty for Mexican exports,
making trade policy a key factor to monitor in the country’s macro
and fixed income outlook.
From our perspective, there remains an appetite for shortand medium-term securities, as bonds continue to serve as
a diversifying asset class offering attractive yields, notably
when considering real interest rate dynamics. Additionally, it is
worth highlighting the record highs reached by Mexico’s stock
market, with the IPC index surpassing 61,000 points. This lends
considerable relative value to Mexican fixed income securities such
as Mbonos, Udibonos and Cetes.
Despite being a smaller market, Mexican corporate bonds have
also played a meaningful role in portfolio diversification throughout
2025, and we expect this trend to continue into 2026. In
a lower interest rate environment, corporate debt may gain
prominence and attract greater demand from investors. However,
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