Mexico CPI-Linked Bonds Rally on Faster Inflation; Peso Tumbles

Yields on Mexico’s inflation-linked bonds fell for the first time in five days as a report showed consumer prices in Latin America’s second-biggest economy rose more than forecast during the first half of this month.

Yields on inflation-linked securities due in December declined four basis points, or 0.04 percentage point, to minus 0.31 percent, according to data compiled by Bloomberg. The peso tumbled along with Latin America’s other five most-traded currencies, dropping 0.7 percent to 13.4018 per dollar. It was the lowest closing level since July 2012.

Mexico’s shortest-term inflation-linked bonds, known as Udibonos, are rallying as investors seek protection from consumer prices that the national statistics agency today said climbed 0.68 percent in the two weeks to Jan. 15, compared with the 0.60 percent median forecast of 20 analysts in a Bloomberg survey. Annual inflation quickened to 4.63 percent from 4.09 percent in the second half of December, above the 4 percent upper limit of the central bank’s target range.

“The inflation statistic is being reflected in the decline in Udibono yields, especially in the short-end,” Gerardo Welsh, the head of money markets at Banco Base SA, said in a telephone interview from San Pedro Garza Garcia, Mexico.

Grupo Financiero Banorte SAB predicts that inflation will rise in the first quarter at the fastest pace since 2010 after new taxes on junk food and higher sales levies in regions bordering the U.S. took effect Jan. 1.

Clyde Wardle, an emerging-markets foreign-exchange strategist at HSBC Holdings Plc in New York, wrote in an e-mail to clients today that Mexico’s currency will strengthen to 12.6 pesos per dollar by the end of the year, an increase of 6.2 percent, as growth accelerates in Latin America’s second-biggest economy.

Argentina, China

Deputy Finance Minister Fernando Aportela said today in a radio interview that Mexico’s economy will probably expand 3.9 percent in 2014. The government estimates that gross domestic product grew 1.3 percent last year.

Argentina’s peso sank 12 percent as the central bank struggled to preserve international reserves. Higher-yielding assets worldwide slumped today after a gauge released by HSBC Holdings Plc and Markit Economics showed China’s manufacturing may contract for the first time in six months.

“The market is already nervous,” Wardle said in an e-mailed response to questions. “The last thing we need is worrying about China’s growth again.”

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