Mexican Central Bank Governing Board meetings are some of the most closely watched and widely reported economic events on the Mexican financial calendar.
Monetary policy is discussed at these Governing Board meetings, which take place eight times a year with statements released at 1 p.m. following each meeting. Statements are usually scheduled for Thursdays and are spaced relatively evenly throughout the calendar year in a similar fashion to the US Federal Open Market Committee (FOMC) meetings.
Any change of policy agreed by the Governing Board will have an immediate impact on market interest rates, as measured by Mexico’s Funding Interbank Equilibrium Interest Rate, which is referred to by its Spanish acronym F-TIIE (TIIE de Fondeo).
CME Group lists 25 monthly Mexican F-TIIE futures contracts on its central matching engine, Globex. Contracts in the first 12 months typically represent the market view of Central Bank policy.
These instruments allow market participants to hedge existing risks associated with changes to the Mexican interest rate or take a speculative view of upcoming policy adjustments. Contracts in the following year can be used to hedge long-term funding requirements.
CME Group F-TIIE futures settle at the end of each month, based on 100 minus the compounded average of each day’s Overnight TIIE Funding Rate.
F-TIIE rates are assigned to every day in a month, including weekends and holidays. On weekends and holidays, rates are assigned based on the previous business day’s rate. For example, the rate assigned to a Saturday and Sunday will be the same rate that was published for the Friday prior to the weekend (assuming Friday was not a holiday). The compounded mean is calculated including all days in a month such that the accrual period of interest is always one day.
At any given time, the quoted price of F-TIIE futures represents the market consensus of what the compounded daily average of the F-TIIE will be at the end of the month. The Central Bank of Mexico publishes the daily F-TIIE rate at approximately 5:00 p.m. US Central Time (CT) each day.
In normal conditions one would expect the rates of overnight TIIE funding to fluctuate in a range near to the current policy rates. This gives the curve and anchor point. If the current month does not contain a Governing Board meeting, we might expect overnight rates to be relatively similar throughout the month and for the price of F-TIIE futures to reflect this. In a month where there is a meeting, the price of F-TIIE futures may not be the same as the prevailing overnight rates and this can be indicative of expectations of monetary policy change.
Comparing F-TIIE prices prior to a meeting date with those after we can determine what probability the market is placing on expectations for a Central Bank policy change at the meeting in between.
Let us work through an example. First, we note the dates of Central Bank of Mexico meetings in 2021:
January | no meeting |
---|---|
February | 11 |
March | 25 |
April | no meeting |
May | 13 |
June | 24 |
July | no meeting |
---|---|
August | 12 |
September | 30 |
October | no meeting |
November | 11 |
December | 16 |
The Central Bank of Mexico moved policy rates down from 4.25% to 4.00% at their meeting on 11 February. If we review a sample of F-TIIE rates around that time, the effect is clear. The change of policy affects rates from the day following the meeting:
F-TIIE | |
---|---|
February 9th | 4.29% |
February 10th | 4.25% |
February 11th | 4.24% |
February 12th | 4.00% |
February 15th | 3.97% |
Source: Central Bank of Mexico
Now we will add some hypothetical prices of CME F-TIIE futures that we will imagine observing in mid-May 2021:
Contract month | Price | Implied interest rate |
---|---|---|
June 2021 | 95.94 | 4.06% |
July 2021 | 95.77 | 4.23% |
August 2021 | 95.75 | 4.25% |
September 2021 | 95.72 | 4.28% |
We can see from the table above that the (hypothetical) prices of F-TIIE futures indicate an expectation of a move upwards in interest rates between June and July of 17 basis points from 4.06% to 4.23%.
Can we be more precise? Perhaps if we add some additional data and make a sensible assumption. We note that on average in the preceding month daily publications of F-TIIE rates were at 4.02% and we assume this level of rates prevails (again on average) until a policy change.
Hence, we can model the month of June as being 24 days of 4.02% plus six days of a higher rate that will return the value of the futures price of 95.94 or 4.06%
Stated another way we have the following:
{[(1 + 0.0402/360)^24 (1 + x/360)^6] - 1 } * 360/30 = 0.0406
Rearranging for x:
x = {{[(0.0406 * 30/360 +1)/ (1 + 0.0402/360)^24]^(1/6)} -1} * 360
x = 4.237
Thus, we now have average F-TIIE rates prior to Central Bank meeting at 4.02% and average F-TIIE rates after the meeting at 4.237% ‒ indicating an expected change of 21.7bp rather than 17bp indicated by the simple spread of prices between futures.
If we further make an assumption that rate moves are in increments of 25bp we can express the probability of a hike or cut as the calculated spread/25, here the simple calculation would imply 17/25 = 68% probability of a rate rise, whereas the more precise calculation would imply 21.7/25 = 86.8%.
In the previous section, we saw how to accurately measure the probability of rate changes implied by market prices. Once we have that measurement, we may want to hedge or manage risk for a different outcome. If you wanted to protect against rates moving lower on an unchanged policy or simply disagreed with the market pricing of nearly 87% probability, you may want to buy July contracts.
July does not have a Governing Board meeting scheduled, so the rate implied by July futures represents the expected prevailing rate for every day in the month. The prevailing F-TIIE rate in the case where the Governing Board decided not to raise rates might be expected to be similar to the current prevailing rates at approximately 4.02%, based on that the July contract price could rise towards 95.98 from its current level of 95.77 giving a buyer of the futures a 21bp profit on any futures.
If, on the other hand, you agreed with the market pricing for a rate rise and felt that it should be 100% priced for a 25bp hike, you might consider selling July futures at 95.77 with a view to the price moving even lower when the expected hike is announced.
CME Group’s F-TIIE futures provide a straightforward way for market participants to try and protect themselves against risks associated with changes to Mexican interest rates or to take a speculative view of potential policy changes.
Housed alongside CME Group’s market-leading US fixed-income franchise, the F-TIIE contracts should also benefit from margin offsets that increase the efficiency in capital terms of trading the Mexican F-TIIE.
Peso-denominated, monthly F-TIIE futures bring price discovery and efficient hedging capabilities to the Central Bank of Mexico’s O/N TIIE Funding Rate (F-TIIE) – an IOSCO compliant, risk-free reference rate based on the highly developed and liquid Mexican repo market.
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