July 22 (Bloomberg) -- Mexico's peso strengthened to the most since 2002 as investors bet the gap between Mexican and U.S. benchmark lending rates widen, drawing demand for the nation's fixed-income securities.

``The appreciation of the peso doesn't look like it's going to come to an end,'' said Eduardo Perez, who oversees $5 billion in assets at insurance company Grupo Nacional Provincial SA in Mexico City.

The peso rose for a third day, increasing 0.9 percent to 10.0365 per dollar at 5:18 p.m. New York time, from 10.1284 yesterday. It touched 10.0351, the strongest since October 2002. Its gain today was the biggest among the six most-traded currencies in Latin America.

Economists predict Mexican policy makers will raise borrowing costs for a third month when they meet in August to curb the highest inflation rate in more than three years, a Citigroup Inc. survey published late yesterday showed.

Banco de Mexico will raise its benchmark by a quarter- percentage point to 8.25 percent on Aug. 15, according to the median estimate of 23 analysts in the survey released by Citigroup's local Banamex unit.

The peso has risen 8.6 percent against the dollar this year as three interest-rate increases since October have widened the spread between Mexican and U.S. target lending rates to 6 percentage points, the biggest since September 2005.

Interest Rate, Oil

The central bank's rate increases and a drop in oil prices suggest inflation will slow in the coming months, boosting demand for the nation's longest-term government securities, said Agustin Villarreal, a bond trader in Mexico City at Invex Casa de Bolsa SA. Crude oil prices today fell below $126 a barrel, from a July 11 record of $147.27.

Mexican bonds rose for the first time in three days, pushing down benchmark yields by the most in nearly two years.

Yields on Mexico's 10 percent bond due in December 2024 fell 16 basis points, or 0.16 percentage point, to 9.1 percent. The yield fell the most since Aug. 11, 2006. The bond's price rose 1.42 centavo to 107.59 centavos per peso, according to Banco Santander SA.

The yield on the government's bond due in 2024, the country's most-traded security, fell after surging 1.72 percentage points from a 10-month low on March 31. That increase in yields has created an ``investment opportunity'' for the nation's government-regulated retirement funds, said Eduardo Silva, head of the country's pension fund association.

Mexico's pension funds, the country's biggest institutional investors with 834 billion pesos ($82.9 billion) in assets as of June, haven't been selling long-term bonds, Silva said in an interview after speaking to reporters in Mexico City today.

``Positions have been maintained,'' he said.

To contact the reporter on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net

Last Updated: July 22, 2008 17:24 EDT