Mexico Bonds Gain as Rate Cut Wagers Add to Fitch; Peso Rises

Mexico’s peso bonds gained, sending yields to a record low, after Fitch Ratings upgraded the nation one notch and as Grupo Financiero Banorte SAB projected the central bank will reduce the key rate in July.

Yields on peso bonds due in December fell two basis points, or 0.02 percentage point, to 3.77 percent today in Mexico City, according to data compiled by Bloomberg. Yields on six-month swaps tied to the interbank rate fell five basis points to 4.16 percent, indicating traders are pricing in about a 72 percent chance that policy makers will reduce rates over the next six months. Yields on benchmark bonds due in 2024 also reached record lows.

Fitch boosted Mexico’s credit rating one level yesterday to BBB+, the third-lowest investment grade, as President Enrique Pena Nieto rewrites laws to lure investment and bolster growth. The central bank is likely to cut its benchmark rate by 0.5 percentage point to 3.5 percent at its July meeting, according to a research report from Banorte analysts including chief economist Gabriel Casillas. Inflation accelerated to 4.65 percent in April from 4.25 percent in March, less than the 4.67 percent pace forecast by 16 economists in a Bloomberg survey.

The bond rally “has to do with the upgrade that Fitch carried out,” Alejandro Padilla, a Banorte strategist, said in a telephone interview from Mexico City. “The quarterly report from the central bank was extremely dovish,” helping prompt his bank to project a rate cut, he said.

The peso dropped 0.2 percent to 11.9970 per U.S. dollar today, after yesterday reaching the strongest level since August 2011. The peso has soared 7.1 percent this year, the most among 16 major dollar counterparts tracked by Bloomberg.

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