Sept. 11 (Bloomberg) -- Mexico’s peso bonds declined after lawmakers from the Institutional Revolutionary Party said they will oppose any proposal to tax food and medicine.

The yield on Mexico’s benchmark peso bonds due 2024 has risen four basis points since Sept. 7 on concern President Felipe Calderon will fail to get enough votes to push through tax increases needed to rein in a widening budget deficit. Calderon needs the support of the opposition party, known as PRI, to win approval for his planned tax law changes after the party became the largest group in the 500-member lower house in July midterm elections.

“The PRI’s negative stance introduces uncertainty regarding the country’s future,” said Alfredo Coutino, director for Latin America at Moody’s Economy.com. “Investors are pricing in that risk.”

The yield on Mexico’s benchmark peso-denominated bonds due in 2024 rose two basis points, or 0.02 percentage point, to 8.25 percent at 5 p.m. New York time, according to Banco Santander SA. The price fell 0.23 centavo to 115.06 centavos per peso.

The proposed 2 percent sales tax on all products, which is part of the government’s planned fiscal reform, will be used to fight poverty, Finance Minister Agustin Carstens has said.

The PRI’s announcement “threatens the proposed 2010 budget and diminishes the government’s efforts to diversify its revenue sources away from oil, which is a major concern of rating agencies,” said Nick Chamie, head of emerging-markets research at RBC Capital Markets in Toronto. “If the government doesn’t achieve this, the chances we’ll see a downgrade are greater.”

‘Highly Contradictory’

In May, Standard & Poor’s lowered the outlook for Mexico’s BBB+ rating, the third-lowest investment grade level, to negative, matching a move that Fitch Ratings made six months earlier as the deepest recession since the 1930s crimps tax collection and as output falls at the state oil monopoly Petroleos Mexicanos. Oil funds 38 percent of the Mexican budget.

The 2 percent duty is “very similar” to a value-added tax and is “highly contradictory” because it would hurt the spending power of low-income Mexicans, PRI lawmakers said in a statement yesterday.

“This is not good news for the market players that were bullish on Mexican assets,” Benito Berber, an economist at RBS Securities Inc. in Stamford, Connecticut, wrote in a report today.

The peso rose 0.2 percent to 13.3372 per U.S. dollar, from 13.3680 yesterday. The currency strengthened 0.2 percent this week.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net;

Last Updated: September 11, 2009 17:19 EDT