Mexico Bond Yields Tumble After Rate Decision; Peso Declines

Mexico’s bond yields fell to their lowest level since July, extending last week’s tumble, after policy makers signaled that slowing inflation may prompt them to cut benchmark rates for the first time in three years.

Yields on the government’s peso bonds due 2022 fell 11 basis points, or 0.11 percentage point, to 5.09 percent at 4 p.m. in Mexico City, after dropping 20 basis points last week. It was the yield’s lowest closing level since July 23. The peso declined 0.3 percent to 12.7000 per U.S. dollar.

“The concern they had about inflation was switched to a concern about growth,” Mario Copca, a currency and fixed-income strategist at Metanalisis SA in Mexico City, said in a phone interview from Mexico City. “The expectation of a possible rate cut is making it so flows will continue to come into the local market” from investors looking to benefit from rallying bond prices.

In a statement accompanying their decision to leave the benchmark rate at 4.5 percent on Jan. 18, policy makers said that if a “downward trend in general and core inflation” is confirmed, a rate cut may be “advisable.” The comment damped speculation that policy makers led by Governor Agustin Carstens would boost rates, a move that would reduce the attractiveness of outstanding bonds, according to Copca.

The central bank said Jan. 18 that the inflation outlook has improved while risks to economic growth persist.

The government’s bonds due 2022 yield 3.36 percentage points more than similar-maturity U.S. Treasuries. Mexico’s record-low 4.5 percent benchmark borrowing cost compares with key rates of less than 1 percent in the U.S., Japan and Europe. Mexican policy makers last adjusted benchmark rates in July 2009 when they lowered borrowing costs by 25 basis points.

Seeking Returns

“Foreign capital continues looking for returns,” Jose Carreno, a bond trader at Banco Base SA, said in a telephone interview from San Pedro Garza Garcia.

Citigroup Inc.’s local Banamex unit said in a note to clients on Jan. 18 that it was changing its end of the year projection for the Mexican peso to 12.5 per U.S. dollar from 12.6 per dollar. Foreign investment in the $144 billion market for fixed-rate peso bonds, known as Mbonos, grew to 54.9 percent on Jan. 8, the highest proportion since February 2000, central bank data show.

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