Biggest Rally Since August Fueled by Rate Bets: Mexico Credit

Mexico's Central Bank Governor Agustin Carstens
Central bank Governor Agustin Carstens may reduce the benchmark interest rate from a record low 4.5 percent next month to spur expansion in Latin America’s second-biggest economy amid a global slowdown, rate futures show. Photographer: Joshua Roberts/Bloomberg

Mexico’s peso bonds are posting their biggest rally in three months on speculation the central bank will lower borrowing costs for the first time since July 2009 to shore up economic growth.

Yields on Mexico’s benchmark notes due in 2024 tumbled 67 basis points in the month through Nov. 4, the most since the 30-day period ended Aug. 4, to 6.33 percent, according to data compiled by Bloomberg. The yield on Brazil’s real-denominated debt maturing in 2021 fell 13 basis points, or 0.13 percentage point, during the same period to 11.47 percent. Yields on Colombia’s peso bonds due in 2024 fell 24 basis points to 7.46 percent.

Central bank Governor Agustin Carstens may reduce the benchmark interest rate from a record low 4.5 percent next month to spur expansion in Latin America’s second-biggest economy amid a global slowdown, rate futures show. The European Central Bank unexpectedly cut borrowing costs to boost growth last week and the Federal Reserve said “significant downside risks” remain for the U.S. economy, the destination for 80 percent of Mexican exports.

“There’s still room” for Mexican peso bond yields to fall, Henry Stipp, who helps manage $2.6 billion in emerging-market debt, including Mexican notes, at Threadneedle Asset Management in London, said in a telephone interview. Slowing U.S. growth “takes pressure off Mexican aggregate demand growth and allows rates to fall. That’s the normal pass through from the crisis that you’ve seen. Everyone has revised growth lower,” he said.

‘React Opportunely’

Yields on futures contracts for the 28-day TIIE interbank rate due in December were at 4.70 percent last week, indicating traders expect the central bank to trim borrowing costs by 25 basis points that month. Mexico, the only major Latin American country to leave rates on hold over the past year, would be following Indonesia and Israel if it lowers borrowing costs in December.

Mexican policy makers signaled in the minutes of their meeting on Oct. 14 that they may reduce interest rates if the economic slowdown curbs inflation. Banco de Mexico is prepared to “react opportunely,” according to the minutes released on Oct. 28.

A press official at the central bank didn’t respond to an e-mail and a voice message seeking comment.

Consumer prices rose 3.21 percent in the 12 months through October, according to the median forecast of five analysts in a Bloomberg survey. Mexico’s national statistics agency will publish the report on Nov. 9. Annual inflation was 3.14 percent in September, within 0.1 percentage point of a five-year low reached in March.

‘Mild Recession’

Mexico’s expansion will slow to 4 percent this year from 5.4 percent in 2010, the Finance Ministry said Sept. 8. The U.S. economy will grow 1.7 percent this year, compared with 3 percent in 2010, according to the median estimate of 80 analysts surveyed by Bloomberg. European Central Bank President Mario Draghi said the region’s debt crisis is hindering growth and pushing it toward a “mild recession by year-end.”

“Further deterioration of global growth conditions has already happened, not only in Mexico and the U.S. but everywhere else,” Gabriel Casillas, chief Mexico economist at JPMorgan Chase & Co., said in a telephone interview from Mexico City. “All market analysts and economists are trimming their growth forecasts everywhere.”

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries fell one basis point to 210 at 3:31 p.m. in Mexico City, according to JP Morgan.

Peso Slump

The peso rose 0.5 percent to 13.4237 per U.S. dollar after declining 3.6 percent last week. It’s down 11 percent in the past three months.

The cost to protect Mexican debt against non-payment for five years rose 11 basis points last week to 141, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Siobhan Morden, the head of Latin American strategy at RBS Securities Inc., said the currency’s slump may keep the central bank from cutting rates. A weaker peso may drive up the cost of imports, helping fan inflation, she said.

The peso “is a concern for them,” Morden said in a telephone interview from Stamford, Connecticut. “They don’t have a dual mandate. They have a single mandate, which is inflation, and the longer the peso stays at these levels and does not recover, that is going to pass through higher tradable inflation.”

Yields on Mexico’s bonds due in 2024 have dropped 87 basis points this year, according to data compiled by Bloomberg.

For peso debt, “the most important thing is the slowdown that you’ve had in the U.S.,” Threadneedle’s Stipp said. “There is no pressure for them to hike rates at all, the only pressure is actually pressure, or space for them, to cut rates or to be constant for now.”

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