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Mexican Bonds Slump on Reduced Economic Prospects; Peso Tumbles

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May 28 (Bloomberg) -- Mexican government bonds fell, pushing yields to their highest level in four months, as speculation that the Federal Reserve will curtail a stimulus program diminished the Latin American country’s prospects.

Yields on peso-denominated benchmark debt due in December 2024 rose seven basis points, or 0.07 percentage point, to 5.20 percent at 4 p.m. in Mexico City, the highest level on a closing basis since Jan. 28, according to data compiled by Bloomberg. The peso declined 1.3 percent to 12.6329 per U.S. dollar, paring its gain in 2013 to 1.7 percent. It was the biggest daily drop since April 15.

While data this month showed that Mexico’s economy grew at the slowest pace last quarter since the 2009 recession, reports today indicating a boost in U.S. consumer confidence to a five-year high and increased home prices stoked speculation that the Fed will reduce asset purchases that have helped fuel demand for Mexico’s higher-yielding assets.

The U.S. reports are spurring “just more of the noise about maybe the Fed starting to taper sooner rather than later,” Kevin Daly, a money manager who oversees $12 billion in emerging-market assets at Aberdeen Asset Management Plc, said in a telephone interview from London. “In theory, stronger U.S. macro should be good for the Mexican peso, but that’s going to also lead to rising U.S. Treasury yields, which could also be slightly negative for Mexican bonds. It’s a bit of a mixed message for Mexico.”

U.S. Treasury 10-year note yields rose today to their highest level since April 2012. Mexico’s bonds are historically the most correlated in Latin America to Treasuries.

Peso Bonds

Demand for peso assets has fallen since Fed Chairman Ben S. Bernanke said last week that policy makers may cut the pace of bond purchases at the next few policy meetings if they see indications of sustained growth. Foreign investors, facing interest rates in the U.S. and Japan at virtually zero, had been pouring money into peso bonds to profit from higher yields.

Banco de Mexico policy makers, which cut the target lending rate in March for the first time since July 2009, will reduce the 4 percent benchmark by 25 basis points in September and October, Credit Suisse Group AG analysts said in a research note to clients. The bank previously called for a one-time cut of 50 basis points in July.

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

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