Colombia Bond Yields Drop to Record on Rate Outlook; Peso Falls

Colombia’s peso bond yields fell to a record low amid mounting speculation that policy makers will reduce benchmark borrowing costs at least once more to revive the slowing economy.

The yield on the government’s peso-denominated bonds due in 2024 fell three basis points, or 0.03 percentage point, to 5.01 percent at the close of trading in Bogota, according to the central bank.

Yields have fallen 18 basis points since a Feb. 5 report showed annual inflation slowed to 2 percent in January, the lowest level since April 2010 and at the bottom of the central bank’s 2 percent to 4 percent target range. Policy makers will lower the key rate 25 basis points to 3.75 percent at a Feb. 22 meeting, Felipe Hernandez, a Stamford, Connecticut-based economist at Royal Bank of Scotland Group Plc, wrote in a note to clients today.

“Additional interest rate cuts are likely as inflation remains in the lower end of the target and domestic demand and economic growth, albeit positive, are still weak,” Hernandez wrote. Expectations for additional cuts will extend a rally in the peso bonds if the central bank maintains “a dovish tone,” Hernandez, wrote.

Three-month swap rates, an indication of expectations for the direction of benchmark rates, show that traders are betting on at least one more interest rate cut.

The peso weakened 0.2 percent to 1,787.05 per U.S. dollar, paring its gain this week to 0.1 percent. The currency has dropped 1.1 percent this year as the government and central bank announced increased dollar purchases to stem a rally that sent the peso to a 17-month high on Jan. 2.

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