Colombia Bond Yields Fall to Record Low After Surprise Rate Cut

Colombia’s peso bonds rose, pushing yields on benchmark securities to a record low for a second straight day, after the central bank unexpectedly cut interest rates last week for the first time since 2010.

The yield on Colombia’s 9.25 percent peso-denominated debt due in May 2014 fell two basis points, or 0.02 percentage point, to 5.39 percent, extending its monthly decrease to 30 basis points, according to the central bank. The yield is the lowest on a closing basis since the securities were first issued in 2009. The price rose 0.0210 centavo to 106.3660 centavos per peso today.

“Bonds have been rallying after the rate cut,” said Alejandro Reyes, the head analyst at Ultrabursatiles SA brokerage in Bogota.

The central bank’s seven-member board, led by bank chief Jose Dario Uribe, voted to lower 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.

Colombia’s central bank published a resolution on its website yesterday adding bonds issued by Banco de la Republica to the list of assets that can be used to back repurchase agreements auctioned by the bank.

Reducing Liquidity

That follows a resolution published on the central bank’s website April 30 that stated that Banco de la Republica can issue debt to lower the amount of local currency in circulation. The bank hasn’t said if it plans to issue bonds.

Speculation that the central bank will offer its own debt to reduce liquidity in the market may ease gains in short-term securities, according to Reyes.

“The central bank may need to issue bonds if it plans to increase its dollar purchases,” Reyes said. “That may mean an increased supply of short-term debt if that is what they finally issue.”

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, Finance Minister Juan Carlos Echeverry said in a W Radio interview yesterday that policy makers are considering a boost in the purchases.

The peso erased earlier gains, declining 0.1 percent to 1,792.20 per U.S. dollar. The currency has dropped 0.5 percent this month, paring its rally this year to 8.2 percent, still the best performance among all of the world’s counterparts tracked by Bloomberg.

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