Colombia Bond Yields Plunge on Interest-Rate Cut; Peso Declines

Colombian bond yields dropped the most in three years after the central bank unexpectedly lowered borrowing costs last week by a half-percentage point, citing weak growth and slower-than-target inflation.

Yields on peso bonds due in 2024 fell 22 basis points, or 0.22 percentage point, to 4.89 percent at the close of trading in Bogota, according to the central bank. The drop was the biggest on a closing basis since May 2010. Colombian markets were closed yesterday for a national holiday.

Banco de la Republica accelerated the pace of reductions in borrowing costs when it cut the target lending rate by 50 basis points to 3.25 percent on March 22. Policy makers reduced benchmark borrowing costs by a quarter-percentage point at each of the central bank’s previous four meetings. Last week’s decision surprised all 32 analysts surveyed by Bloomberg, with 27 economists forecasting another quarter-point cut last week while five projected no change.

“No one was expecting a 50 basis point cut,” said Francisco Chaves, a fixed-income strategist at Corredores Asociados brokerage in Bogota. “Some had closed their bond positions on bets we wouldn’t see more cuts, and obviously that decision is turning out to be very costly.”

Yields on the peso bonds due 2024 have plunged 77 basis points this year as policy makers reduced the overnight lending rate by 200 basis points since July to buoy growth in the Andean country. Chaves forecasts the yield on the debt will fall to 4.60 percent in April.

Economic Growth

The unanimous rate decision was taken as the economy grows below potential, central bank Governor Jose Dario Uribe told reporters after the policy meeting. Finance Minister Mauricio Cardenas, who is also president of the bank’s board, said the reduction in borrowing costs will help the economy expand toward its potential growth rate of 4.8 percent per year.

The economy grew 4 percent in 2012, down from a revised 6.6 percent in 2011. Inflation of 1.83 percent in February was the slowest since 1955 and below the 3 percent midpoint of the central bank’s target range.

The peso slipped 0.1 percent to 1,831 per U.S. dollar today, extending its drop this year to 3.5 percent.

Cardenas told reporters last week after the rate cut announcement that the lower interest rate will help “break with expectations for a stronger currency.”

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