Mexico's Above-Target Inflation to End Bond Rally, Aviva Investors Says

Mexico’s peso bonds will likely end a rally that drove yields to a record low after the central bank reports that inflation missed its target last month, said Kieran Curtis, a fund manager at Aviva Investors.

The central bank will probably say tomorrow that Mexican consumer prices rose 3.97 percent in the 12 months through May, above its 3 percent target, according to the median estimate of 13 analysts surveyed by Bloomberg. That will push up yields on the benchmark 2024 bond by as much as 17 basis points, or 0.17 percentage point, to 7.5 percent as soon as next week, said Curtis, whose fund has returned 20 percent this year, compared to an average 5 percent for rivals, according to Bloomberg data.

“This isn’t a convincing performance” by Mexico’s central bank, said Curtis, a London-based money manager who oversees about $100 million of peso-denominated government debt and $2 billion overall in emerging-market debt. “Inflation has been disappointing, and there is clearly a chance the bonds’ yields will go up.”

Inflation, which has been above the central bank’s target all year, will not reach the 3 percent level until the end of 2011, Miguel Messmacher, the Finance Ministry’s chief economist, said last week.

Before today, Mexico’s benchmark bonds had climbed for 14 days on signs the economy is recovering and as Citigroup Inc. said the securities will be added to its World Government Bond Index in October. The yield rose nine basis points to 7.334 percent today and before today had plunged 55 basis points May 18.

Interest Rates

Mexico’s industrial output climbed 7.6 percent in March, the most in almost four years, the national statistics institute said May 12 on its website, higher than the median forecast of 5.9 percent, according to a Bloomberg survey of 17 analysts. The economy grew 4.3 percent in the first quarter from a year earlier, the first increase on an annual basis in more than a year, the agency said May 20, beating the forecast of 4 percent, according to 20 economists surveyed by Bloomberg.

The central bank kept its benchmark interest rate at a record low 4.5 percent for a ninth straight meeting on May 21. The economy may grow 4.4 percent this year, after contracting 6.5 percent last year, according to the median estimate of 11 analysts in a Bloomberg News survey.

“We are in unchartered territory,” Curtis said. “To get to a lower yield, we have to get comfortable with inflation, and Mexico basically consistently disappoints on the inflation side.”

Inflation quickened this year as the government increased taxes and the cost of gasoline and other government-controlled goods to help narrow the widest budget deficit in about 20 years. Central Bank Governor Agustin Carstens has said the prices will have a “one-time” effect.

Yields on Mexico’s benchmark bonds will probably continue to face “downward pressure” as the inclusion of the securities in the Citigroup index draws more investors, Sergio Luna, an economist at Citigroup’s Banamex unit in Mexico City, said in a note to clients yesterday.

To contact the reporters on this story: Andres R. Martinez in Mexico City at

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