Mexico Peso Bonds Rally on Outlook for Rate Cut; Currency Rises

March 7 (Bloomberg) -- Mexico’s shorter-term bonds rallied as slower-than-forecast inflation fueled speculation that policy makers will reduce benchmark borrowing costs tomorrow for the first time since 2009.

Yields fell the most since Dec. 13 after the national statistics agency said consumer prices rose 3.55 percent in February from a year earlier, less than the 3.60 percent median forecast of economists surveyed by Bloomberg.

The decline in yields is “part of what we’ve seen in recent weeks with the outlook that the Bank of Mexico could cut rates,” Rafael Camarena, an economist at Grupo Financiero Santander Mexico SAB who is forecasting a 0.5 percentage point reduction tomorrow in the 4.50 percent target rate, said in a telephone interview from Mexico City.

Yields on peso-denominated debt due in December 2013 tumbled seven basis points, or 0.07 percentage point, to a record low 4.16 percent at 4 p.m. in Mexico City, according to data compiled by Bloomberg. Mexico’s currency appreciated 0.2 percent to 12.7587 per U.S. dollar.

Grupo Financiero Banorte SAB said in a note to clients that below-forecast inflation supports its expectations that the central bank will cut the overnight rate by as much as 75 basis points tomorrow.

Yields on interbank futures contracts due in March have dropped 0.38 percentage point since before the last rate decision in January to 4.47 percent, indicating investors have been boosting bets on a rate cut to be announced tomorrow, according to data compiled by Bloomberg.

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