'Two things happen when you shoot 66,' said Marsh. 'You hit some shots and make some putts.'
Jay Sigel carded his second straight round of 69 to finish two shots back at 6-under-par 138. Tom Kite managed a 68 to join Jim Ahern in a tie for fourth at 4-under-par 140.
Marsh began Saturday three shots off the pace at BosqueReal Country Club and jumped out of the gate with a birdie at the par-4 first.
The 60-year-old added a birdie at the par-4 third and picked up the first of three consecutive birdies at the par-4 fifth to move to the top of the leaderboard.
Marsh carried over his fine play from the front side with a birdie at the par-4 10th before finding trouble with a three-putt bogey at the par-5 sixth.
The Australian recovered at the par-4 16th and played his second shot to six feet for a birdie to secure a slim lead with one round to play.
'My strategy tomorrow will be to let the course come to me,' said Marsh, who is seeking his seventh career victory on the Champions Tour. 'You have to manage yourself out there.'
Baiocchi had a very active start to his round with five birdies and two bogeys over his first nine holes.
He reached 5 under with a birdie at the par-4 10th and continued to put the pressure on Marsh with a birdie at the 12th.
Baiocchi then closed with a birdie at the par-5 last to complete a 66 of his own.
'All in all, a 66 is a good score here,' said Baiocchi. 'Mexico has been very good for me.'
Hale Irwin collected two birdies and a bogey for a round of 71. Irwin was joined by Jack Spradlin and first-round leader Andy Bean in a tie for sixth at 3-under-par 141.
Mark James, Sam Torrance and Darrell Kestner were one shot further back at 2-under-par 142.
Defending champion David Eger shot a 71 to finish alongside Ed Fiori, John Jacobs and Bobby Lincoln at 1-under-par 143.