Bloomberg News

Peso Bond Rally Fueled by Slowing Inflation: Mexico Credit

June 27, 2011

June 27 (Bloomberg) -- Mexican bonds are posting their biggest gain in 10 months on speculation slowing inflation will prompt the central bank to keep interest rates at a record low.

The yield on the government’s notes due in 2024 dropped 22 basis points in the five days ending June 24, the biggest weekly slide since August, to 7.07 percent, according to data compiled by Bloomberg. In Brazil, yields on the country’s real- denominated bonds maturing in 2021 climbed nine basis points, or 0.09 percentage point, during the same period, to 12.41 percent.

The slowest inflation in almost five years has allowed central bank Governor Agustin Carstens to hold borrowing costs at 4.5 percent, the only major Latin American country to leave rates unchanged in the past year. Annual inflation through mid- June in Latin America’s second-biggest economy slowed to 3.2 percent from May and touched a five-year low of 3.04 percent in March. Consumer price increases in Brazil, the region’s largest economy, quickened to a six-year high of 6.55 percent in mid- June.

“The fundamental story of inflation is just very positive,” Alberto Bernal, head of fixed income research for Miami-based Bulltick Capital Markets, said in a telephone interview. “We’ve been very vocal about being long in the long end, and so far so good.”

Yields on 28-day interbank rate futures due in February, known as TIIE, declined 14 basis points last week to 5.04 percent, indicating traders are betting the central bank will wait until that month to increase the key rate. As recently as April 4, they predicted an increase by July, according to data compiled by Bloomberg.

Food Prices

Rising unemployment and slumping consumer confidence are helping keep inflation in check, Bernal said. The jobless rate rose to 5.2 percent in May from 5.1 percent in April, while the country’s consumer confidence index unexpectedly fell in May, according to the national statistics institute.

A drop in food and beverage costs helped spark an unexpected decline in consumer prices in the first half of June. Prices fell 0.05 percent in the first two weeks of the month, the central bank said on June 23. Economists had forecast an increase of 0.11 percent, according to the median estimate of 14 analysts surveyed by Bloomberg.

The record 11.1 percent rally in the Mexican peso versus the U.S. dollar in the past two years is also helping curb inflation, said Alejandro Padilla, a debt strategist at Grupo Financiero Banorte-Ixe in Mexico City. He recommends investors buy Mexican peso bonds maturing in 2013 and 2015.

The U.S. is the destination for 80 percent of Mexico’s exports.

‘Positive Effect’

“There’s a positive effect from the exchange rate,” Padilla said in a telephone interview. “Their inflation reports keep showing signs that there aren’t inflationary pressures on the side of internal demand. We don’t see any factors that could push the Mexican central bank to move up its tightening cycle.”

The peso rose 0.1 percent to 11.8904 per U.S. dollar at 5 p.m. New York time.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed 12 basis points to 140, according to JPMorgan Chase & Co.’s EMBI Global index.

The cost to protect Mexican debt against non-payment for five years was little changed at 115 basis points, 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.

Greece Overshadows

Concern that Greece may default may overshadow Mexico’s inflation data, driving up yields on Mexican peso bonds, said Emilio Diez de Sollano, a debt analyst with Monex Casa de Bolsa SA in Mexico City.

European Union leaders last week vowed to stave off a Greek default as long as Prime Minister George Papandreou pushes through a package of budget cuts, pledging to do whatever it takes to stabilize the euro economy.

“Now that these fears are exploding, and with decisive decisions pending, Mexican bond yields could possibly register additional increases,” Diez de Sollano said in a telephone interview.

Slowing growth in the U.S. is also helping curb inflation in the Latin America country, Bulltick’s Bernal said.

Federal Reserve officials last week cut their growth forecasts for the U.S. economy this year and next. The world’s biggest economy will expand by 2.7 percent to 2.9 percent this year, down from April’s forecasts of 3.1 percent to 3.3 percent, based on the median range of projections.

“We don’t really see factors that could take inflation to levels that could worry the Bank of Mexico,” Banorte-Ixe’s Padilla said. “That makes a good argument for continuing to invest in these bonds.”

--Editors: Lester Pimentel, Brendan Walsh

To contact the reporter on this story: Jonathan J. Levin in Mexico City at

To contact the editor responsible for this story: David Papadopoulos at

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