Mexico Bond Yields Drop on Rate-Cut Speculation; Peso Declines

Mexican shorter-term bond yields declined to record lows on speculation policy makers will further reduce benchmark borrowing costs amid signs of slowing economic growth.

Yields on peso bonds due in December 2014 dropped two basis points, or 0.02 percentage point, to 3.77 percent at 10:22 a.m. in Mexico City, according to data compiled by Bloomberg. That is the lowest since the securities began trading in 2005. The currency fell 0.7 percent to 12.1684 per U.S. dollar, paring its gain this year to 5.7 percent, still the biggest among the greenback’s 16 most-traded currencies tracked by Bloomberg.

Royal Bank of Canada reiterated today in a research note to clients that it projects Mexico’s policy makers will cut the benchmark rate in July if annual inflation slows to below the upper end of their target range of 2 percent to 4 percent. Industrial production in Latin America’s second-biggest economy fell three times more than forecast in March, the national statistics agency reported last week.

“People are convinced another rate cut is coming,” Alejandro Urbina, who helps oversee about $800 million in emerging-market assets at Silva Capital Management LLC in Chicago, said in an e-mailed response to questions. “Now, most of the analysts/economists are only sorting out when and how much. That is what is going on in the short end of the curve.”

The central bank left its target lending rate at a record low 4 percent on April 26 after unexpectedly cutting it by a half-percentage point on March 8. HSBC Holdings Plc forecast on May 10 that policy makers will make a 0.5 percentage point reduction in July after earlier seeing no change through 2014.

Six-month swaps tied to the interbank rate yield 4.20 percent, indicating traders are projecting about a 56 percent chance that policy makers will reduce borrowing costs over the next six months.

To contact the reporter on this story: Ben Bain in Mexico City at bbain2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.