Two-Year Cetes Offer Higher Yields Amid Inflation Expectations

In the recent government securities auction, two-year Federal Treasury Certificates (Cetes) emerged as the most attractive option for investors, recording the highest yield among the available terms. While 28-day, three-month, and six-month Cetes offered rates of 8.10%, 8.09%, and 8.04% respectively, the two-year term reached a yield of 8.49%, standing out in the current context of economic uncertainty.

The preference for longer-term instruments reflects the inflation expectations signaled by private analysts, who are forecasting additional inflationary pressures toward the end of 2024. This outlook directly influences decisions made by the Bank of Mexico (Banxico), which recently announced through its quarterly report and the minutes from its latest meeting its intention to continue with gradual adjustments to the benchmark interest rate. A cut of 50 basis points is expected at the upcoming June meeting, with possible additional reductions of 25 basis points at subsequent meetings, depending on inflation developments.

Inflation, which ended 2023 slightly above Banxico’s target and has shown some resistance to decline in the early months of 2024, is limiting the central bank’s room to lower interest rates aggressively. This scenario explains the appeal of longer-term Cetes, as investors seek to protect their assets amid the possibility that elevated rates will persist if inflation does not ease sufficiently.

Cetes yields continue to serve as a key benchmark for both institutional investors and individual savers in Mexico, in an environment marked by global financial volatility and high levels of uncertainty. Additionally, Banxico’s upcoming monetary policy discussions and the movement of international prices—especially for commodities—will be crucial for the direction of government bond yields in the coming months.

In summary, the uptick in two-year Cetes yields reflects both the caution among investors facing a persistently inflationary scenario and expectations regarding the gradual pace Banxico will maintain in cutting rates. The evolution of these factors will continue to influence investment decisions and the trajectory of financial indicators throughout the rest of the year.