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Mexico Peso Bonds Rally on Surprise Rate Cut; Currency Advances

Mexico’s peso-denominated bond yields tumbled the most in three years after policy makers cut the country’s key rate to a record low amid slowing growth in Latin America’s second-biggest economy.

Yields on the bonds maturing in June 2015 fell 23 basis points, or 0.23 percentage point, to 3.96 percent, data compiled by Bloomberg show. It’s the biggest yield drop since July 2011 on a closing basis. The peso gained 1.7 percent to 13.1670 per U.S. dollar in Mexico City.

Banco de Mexico cut the country’s key rate by 0.25 percentage point to 3.75 percent, surprising all but one of 20 economists surveyed by Bloomberg. The reduction should help to ease the recent slump in the country’s bonds, according to Bernd Berg, an emerging-markets strategist at Credit Suisse Group AG. The yields had surged since May on speculation the U.S. Federal Reserve is moving to curtail monetary stimulus that boosted demand for emerging-market assets.

“The rate cut is anchoring expectations for Mexican yields and provides a ceiling even if U.S. yields rise further,” Berg wrote in an e-mailed response to questions. “The focus of the central bank might have shifted to support growth.”

Mexico’s benchmark IPC stock index of 35 companies rose 0.6 percent, after falling as much as 0.3 before the decision. Retailer El Puerto de Liverpool SAB rose 2.6 percent, while billionaire Carlos Slim’s bank, Grupo Financiero Inbursa SAB, rose 1.8 percent.

Economic Risks

The central bank, led by Governor Agustin Carstens, said in a statement accompanying its decision that economic risks have intensified and growth next year will be lower than the 3.2 percent to 4.2 percent forecast that it had reaffirmed on Aug. 7.

Banco de Mexico cut its growth forecast last month, projecting the economy will expand as little as 2 percent this year, half the pace of 2012 and the least in four years, amid stagnant exports to the U.S. and a first-half drop in government spending. The annual inflation rate fell in each of the past three months to 3.47 percent in July, amid an easing in farm price pressures.

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