Mexican Bonds Post Weekly Rally on Rate-Cut Outlook; Peso Gains

Mexico’s benchmark bonds posted a weekly gain on speculation the central bank will cut interest rates for the first time since 2009.

Yields on the government’s peso-denominated bonds due in 2024 have fallen seven basis points, or 0.07 percentage point, this week to 5.10 percent. With its one basis point decline today, the yield fell 31 basis points in the past month after reaching a record low of 5.06 percent on Feb. 6.

Annual inflation slowed to 3.25 percent in January from 4.77 percent in September as egg and poultry prices fell following a surge triggered by an outbreak of bird flu. The central bank said in a report on Feb. 13 that it expected inflation to remain near a 3 percent target for most of this year and next, adding to rate-cut speculation.

“There have been a series of central bank publications pointing to a much higher probability of a rate cut,” said Nader Nazmi, an economist at BNP Paribas SA in New York. BNP expects a cut of 50 basis points as early as June, he said.

The central bank, which has left the key rate unchanged at 4.5 percent for 32 straight meetings, will announce its next rate decision on March 8. Interest-rate futures contracts, known as TIIE, indicate that traders expect policy makers to will make a cut then.

Central bank Governor Agustin Carstens, who hasn’t adjusted borrowing costs so far during his three-year tenure, said on Feb. 13 that policy makers may reduce rates “if we keep advancing in this convergence process, and it’s shown that we have inflation each time closer to 3 percent in a more sustainable way.”

After the release of the quarterly report and Carstens’s comments, JPMorgan Chase & Co. and Barclays Plc projected a half-percentage point cut in June, changing their previous forecasts of no change during 2013.

The peso was little changed today at 12.6899 per dollar. It advanced 0.3 percent this week.

The difference between the number of wagers by hedge funds and other large speculators on a peso advance versus those on a drop -- so-called net longs -- fell this week by the most since the week of Nov. 13, according to data released today by the Washington-based Commodity Futures Trading Commission. There were 124,579 net longs on Feb. 12 compared with 141,502 a week earlier, the data showed.

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