Mexico Yields Fall to Record After Carstens Comment; Peso Rises

Mexican bond yields tumbled to a record a day after central bank Governor Agustin Carstens said policy makers will consider cutting borrowing costs if annual inflation slows to within the target range.

Yields on peso-denominated benchmark debt due in 2024 fell five basis points, or 0.05 percentage point, to 4.52 percent at 4 p.m. in Mexico City, according to data compiled by Bloomberg. It was the biggest decline on a closing basis since April 19 and extended the drop this month to 49 basis points. The peso appreciated 0.6 percent to 12.1340, boosting its rally in April to 1.6 percent, the most among major Latin America dollar counterparts tracked by Bloomberg.

Carstens said in an interview yesterday with Radio Formula that the central bank would consider lowering the target lending rate if annual inflation slowed to less than 4 percent, the upper end of policy makers’ target range of 3 percent, plus or minus 1 percentage point. Consumer prices rose 4.72 percent in the 12 months through the first half of April.

“The bias is to cut, there’s a willingness to cut,” Benito Berber, a Latin America strategist at Nomura Holdings Inc., said in a telephone interview from New York. “If the central bank will ultimately cut, eventually there’s going to be a rally.”

The central bank’s board left the target lending rate at a record low 4 percent on April 26 after cutting the benchmark by a half-percentage point on March 8.

Carstens said in the interview yesterday that inflation will probably slow to within the 2 percent to 4 percent target range in the second half of the year.

‘Additional Movement’

“Perhaps once we’re in this circumstance there’s a possibility to consider an additional movement,” Carstens said. “But while this inflationary hump, so to speak, doesn’t ease, and we don’t have the certainty that it will ease, it’s difficult to carry out an additional movement on interest rates.”

Yields on six-month swaps tied to the interbank rate fell 0.06 percentage point to 4.22 percent today, indicating that traders are projecting an almost 50 percent chance that policy makers will reduce borrowing costs within the next six months for the first time since they cut the target rate in March.

The rate projection is derived by subtracting the average difference between yields for the 28-day interbank deposit rate, or TIIE, and the overnight benchmark from the futures contract from the yield on the six-month swaps. In the past five years, the spread between the TIIE and the overnight bank rate has averaged 0.34 percentage point.

Before it's here, it's on the Bloomberg Terminal.