Bloomberg News

Slowing Inflation Unifying Traders, Economists: Mexico Credit

June 28, 2011

June 28 (Bloomberg) -- Mexican traders and economists are pushing back their forecasts for interest-rate increases to next year, reaching a consensus for the first time in eight months as inflation slows in Latin America’s second-biggest economy.

Yields on the 28-day interbank rate futures due in January, known as TIIE, dropped 15 basis points, or 0.15 percentage point, in the past month to 4.99 percent, indicating traders are betting central bank Governor Agustin Carstens will wait until that month to raise the benchmark rate. Economists moved their forecast for a rate boost to March from January, according to a survey by Citigroup Inc.’s Banamex unit on June 20.

Falling consumer prices and slowing economic growth are boosting speculation Carstens will hold the key lending rate at a record low 4.5 percent, leaving Mexico as the only major Latin American country to keep borrowing costs unchanged in the past year. Annual inflation through mid-June slowed to 3.2 percent from May and touched a five-year low of 3.04 percent in March. In Brazil, the region’s biggest economy, traders are betting the central bank will lift rates by 25 basis points next month to 12.50 percent to slow the fastest inflation in six years.

“With the inflation levels we have seen, there is no pressure for Banxico to raise rates,” Javier Belaunzaran, who helps manage about 40 billion pesos ($3.4 billion) with Interacciones Casa de Bolsa SA, said in a telephone interview from Mexico City. “Slowly, the data began to build up that didn’t back up the recovery and the markets got in line.”

Yields on the government’s peso bonds due in 2024 fell 22 basis points, or 0.22 percentage point, to 7.07 percent last week, the most in 10 months, after consumer prices unexpectedly dropped in the first half of June, according to data compiled by Bloomberg.

Growth Outlook

Policy makers left the rate unchanged for a 19th straight meeting on May 27, saying in a statement that there was a “moderation in the pace” of the economic expansion. The economy grew 4.6 percent in the first quarter, less than the 5 percent median forecast in a survey by Bloomberg.

Economic expansion in the U.S., which buys about 80 percent of Mexico’s exports, is also flagging. 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.

“Slowing inflation and bad economic data are putting the brakes on growth forecasts now,” Alejandro Urbina, who helps manage about $800 million in investments at Silva Capital Management LLC in Chicago, said in a telephone interview.

‘Better Situation’

Consumer demand will help Mexico weather the impact from a slowdown in the U.S., said Alberto Bernal, head of fixed-income research for Miami-based Bulltick Capital Markets. The economy may grow as much as 5 percent this year, he said.

“Mexico is in a better situation, where industry is creating jobs and the jobs are leading to greater consumer spending,” Bernal said in a telephone interview. “The impact from the U.S. is going to be less than usual.”

Mexico’s jobless rate dropped to 5.2 percent in May from 6.4 percent in September 2009, according to the national statistics agency. The U.S. jobless rate was 9.1 percent in May and Brazilian unemployment was 6.4 percent in the same month.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed 9 basis points to 134 at 5 p.m. New York time today, according to JPMorgan.

Default Swaps

The cost to protect Mexican debt against non-payment for five years dropped 2 basis points to 113, 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.

The peso rose 0.7 percent to 11.8067 per dollar.

A surge in commodity prices and signs economic growth was picking up earlier this year had prompted rate-futures traders to predict the central bank would boost borrowing rates as soon as July, Silva Capital’s Urbina said.

“Investors saw all the stimulus and good data that was coming out and they assumed the economy was going to continue going higher,” Urbina said. “Everyone was betting with a better economy and growth, inflation would pick up. That wasn’t what happened. They were taken by surprise.”

--Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Andres R. Martinez in Mexico City at amartinez28@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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