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Colombia’s Peso Bonds Increase After Surprise Interest-Rate Cut

Colombia’s peso bonds rallied, pushing yields down the most since April, after the central bank unexpectedly cut interest rates last week for the first time since 2010 as economic growth slowed.

The yield on Colombia’s 10 percent peso-denominated debt due in July 2024 fell nine basis points, or 0.09 percentage point, to 6.68 percent, according to the central bank. That is the biggest drop since April 9. The yield closed at the lowest level since the securities were first sold in 2009.

The central bank’s seven-member board, led by bank chief Jose Dario Uribe, voted to cut the overnight lending rate by a quarter-percentage point to 5 percent on July 27, surprising 24 of 35 economists surveyed by Bloomberg, who had predicted no change. While all members voted for a rate reduction, some members wanted a bigger cut, according to the statement following the decision.

“Many were expecting a cut but not that soon,” said Munir Jalil, the chief economist at Citigroup Inc.’s Colombia unit. “Some board members wanting an even bigger cut may also mean the rate may end this year lower than many were initially forecasting.” Jalil said he may reduce his year-end forecast for the target rate to 4.75 percent.

Banco de la Republica cut on July 27 its 2012 economic growth forecast to a range of 3 percent to 5 percent from a previous 4 percent to 6 percent and said that growth in 2013 should be similar.

Colombian Growth

The Colombian economy expanded 4.7 percent in the first quarter, the slowest pace since 2010, the national statistics agency said in a June 21 report. Finance Minister Juan Carlos Echeverry, who sits on the central bank’s board, told reporters after the monetary policy meeting that he expects the economy to grow between 4.5 percent and 4.8 percent this year.

Barclays Plc and Nomura Holdings Inc. both wrote in reports today that they expect additional cuts in borrowing costs. Policy makers will cut the target rate by at least another quarter-percentage point to 4.75 percent, according to Barclays. Nomura forecast 4.50 percent or as low as 3 percent if the global economy falls “off a cliff.”

The peso appreciated almost 0.1 percent to 1,790.61 per dollar today, extending its jump this year to 8.3 percent, the best performance among all of the counterparts tracked by Bloomberg. It has fallen 0.4 percent this month.

While Uribe reiterated on July 27 that the central bank will buy a minimum of $20 million daily in the spot market until at least Nov. 2, Echeverry said in a W Radio interview today that policy makers are considering a boost in the purchases.

Repo Auctions

In a separate July 27 statement, the central bank said it will auction 7 trillion pesos ($3.9 billion) in 23-day repurchase agreements today. If the sale falls short of the target, the difference will be offered in a second auction today of seven-day repurchase agreements. The bank will also auction 8.2 trillion pesos in one-day repurchase agreements today, according to the statement.

By increasing the maturity of the repurchase agreements to 23 days, the central bank is looking to “better distribute the liquidity in the different interbank markets,” Jalil said.

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