Mexico Bonds Drop as Central Bank Minutes Show Split; Peso Falls

Mexican peso bonds declined, pushing shorter-term yields up from a record low, as central bank minutes showed board members were divided in the decision to lower borrowing costs this month.

Yields on the securities due in June 2015 rose five basis points, or 0.05 percentage point, to 3.71 percent, paring their drop this week to six basis points, according to data compiled by Bloomberg. The yields fell yesterday to 3.66 percent, the lowest level since they were issued in 2010. The currency depreciated 1.2 percent to 12.8577 per U.S. dollar today, reducing its weekly gain to 1.4 percent.

Minutes of the central bank meeting showed that two of five board members dissented in the Sept. 6 vote to lower the target lending rate by a quarter-percentage point to a record low 3.75 percent. Bonds had rallied since the decision as banks including Credit Suisse Group AG and Citigroup Inc.’s Banamex unit predicted another cut next month.

“After the market saw that the decision was divided, there was some selling,” Gerardo Welsh, the head of money markets at Banco Base SA in San Pedro Garza Garcia, Mexico, said in an e-mailed response to questions. “It affects the probability of another cut at the next meeting.”

The peso dropped for a second day after Federal Reserve Bank of St. Louis President James Bullard said today on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene that a small tapering of bond buying is possible in October after the Fed made a “borderline decision” on Sept. 18 not to slow its stimulus program. The Mexican currency rallied 2.1 percent that day, the biggest advance in three months.

Fed Outlook

The Fed will now wait until December before taking the first step in reducing its $85 billion in monthly bond purchases, according to 24 of 41 economists surveyed by Bloomberg Sept. 18-19.

“People realize tapering is coming,” Eduardo Suarez, a Latin America currency strategist at Bank of Nova Scotia, said in an e-mailed response to questions. “Some of the larger players could use the liquidity of a rally to unwind some of their positions until they get to the levels of exposure they feel comfortable with.”

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