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Mexico Bonds Drop as Cut Speculation Ebbs; Peso Little Changed

Mexico’s peso bonds fell, driving yields to a one-week high, on reduced speculation that central bank Governor Agustin Carstens will lower borrowing costs next month for the first time in his three-year tenure.

Yields on peso bonds due in 2024 rose two basis points, or 0.02 percentage point, to 5.17 percent at 4 p.m. in Mexico City, the highest level on a closing basis since Jan. 31, according to data compiled by Bloomberg. The yields have risen four basis points since Feb. 1 in their first weekly increase since Jan. 4. The currency was little changed at 12.7239 per U.S. dollar, with a loss on the week of 0.9 percent.

Local currency bonds extended a drop that began yesterday after a government report showed inflation exceeded forecasts, damping speculation that Carstens would reduce the 4.5 percent target lending rate.

“The market pushed up a lot their expectations for a possible rate decrease to come soon from the Banco de Mexico,” Gerardo Welsh, a bond trader at Banco Base SA, said in a telephone interview from San Pedro Garza Garcia, Mexico. “The worse-than-expected inflation data caused the market to reconsider this.”

Speculation that the central bank will cut borrowing costs in response to slowing inflation pushed the yield gap between U.S. Treasuries and Mexican fixed-rate bonds maturing in 10 years to a five-year low of 302 basis points on Feb. 5. Policy makers said at their meeting last month that they may ease monetary policy should inflation continue to slow.

Board members were unanimous in their decision to leave rates at a record low 4.5 percent for a 32nd straight time, according to minutes published Feb. 1.

Annual inflation slowed less than forecast to 3.25 percent in January from 3.57 percent in December, the national statistics institute said yesterday on its website. The median projection of analysts surveyed by Bloomberg was for a 3.17 percent yearly pace.

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