June 15 (Bloomberg) -- Mexico’s central bank sold the most government bills in six months to drain pesos from the economy as surging oil exports and record foreign investment in bonds drive up reserves and the money supply.
Banco de Mexico auctioned 133 billion pesos ($11.1 billion) of Cetes, as the bills are known, from its holdings of government debt today, the most since December. The bank had offered as much as 145 billion pesos of the security. Cetes that mature in 28 days yield 4.38 percent, compared with 0.005 percent for similar-maturity U.S. Treasuries.
Policy makers are seeking to keep inflation near a five- year low by reducing the supply of cash after oil, Mexico’s second-largest export, jumped 23 percent in the past year and investors abroad poured $21 billion into the debt market in the six months through March. The central bank purchase of those dollar inflows with pesos drove its foreign reserves up 14 percent in the past year to a record $129.6 billion while the money supply, as measured by the M1 gauge, jumped 14 percent.
“The central bank has to soak up this liquidity,” Gabriel Casillas, chief Mexico economist for JPMorgan Chase & Co. in Mexico City, said in a telephone interview. “There is a need to sterilize. All the foreigners that are coming in create liquidity.”
While inflation is quickening from Brazil to China, Mexican price increases slowed to 3.3 percent in the 12 months through May as a record surge in the peso drove down the cost of imports. The annual inflation rate touched 3.04 percent in March, the lowest level since May 2006.
Overseas purchases of Mexican bonds helped drive down yields on the government’s benchmark notes due in 2024 by 57 basis points, or 0.57 percentage point, in the past three months to 7.22 percent, according to Banco Santander SA.
A rally in the peso and moderate inflation are fueling demand for the country’s debt. The currency is up 5.7 percent against the dollar in the past year. Local Mexican debt returned 8.2 percent in dollar terms this year, compared with an average 6 percent gain for local-market debt from emerging-market countries, according to Bank of America Corp.
The central bank is also auctioning bills before 74.8 billion pesos of maturing government debt over the next four weeks swells the money supply, said Alejandro Padilla, a debt strategist at Grupo Financiero Banorte-Ixe in Mexico City.
A press official at the central bank didn’t return calls for comment. A press official at the Finance Ministry did not return calls for comment.
‘Draining the Liquidity’
“This has a lot to do with draining the liquidity that Mexico is getting from the flow of foreign capital,” Padilla said in a telephone interview. “Even though this is a large quantity, demand is going to be pretty good.”
Banxico, as the central bank is known, auctioned about 75 billion pesos of debt in March, about half of what it offered today.
Foreign investment in Mexico will slow as U.S. economic growth flags, said Eduardo Vazquez, an analyst at Harbor Intelligence in Monterrey. The U.S. buys 80 percent of Mexican exports.
“A slowdown in flows should be expected,” Vazquez said in a telephone interview. “It’s going to be a gradual slowdown.”
The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries widened 9 basis points to 147 at 5 p.m. New York time, according to JPMorgan.
The peso fell 1 percent to 11.9152 per U.S. dollar.
The cost to protect Mexican debt against non-payment for five years rose 4 basis points to 110, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
Yields on futures contracts for the 28-day TIIE interbank rate due in December were unchanged at 5 percent, indicating traders expect the central bank to raise the rate by then. Mexico is the only major Latin American nation to keep its benchmark lending rate unchanged in the past year. The central bank left the rate at a record low 4.5 percent last month.
Traders see a 25.1 percent chance that the Federal Reserve will boost the U.S. overnight rate target of between zero and 0.25 percent at its January meeting, interest-rate futures show.
Foreign investors lifted their holdings of Mexican notes and bills maturing in less than one-year to 33 percent last month from 9 percent a year earlier, according to data compiled by the central bank.
“Investors are devouring any amount of Cetes placed in front of them,” said Javier Belaunzaran, who helps manage about 40 billion pesos at Interacciones Casa de Bolsa SA in Mexico City. “This is just one of the many mechanisms they have to help remove liquidity.”
--Editors: Lester Pimentel, David Papadopoulos
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