Bloomberg News

Banxico on Hold Spurs Sales of Longest-Term Bills: Mexico Credit

July 27, 2011

July 27 (Bloomberg) -- Mexico is stepping up sales of its longest-maturity Treasury bills to tap into growing demand from investors betting the central bank will hold interest rates at a record low until next year.

The government sold 7 billion pesos ($601 million) of the securities yesterday, the most since September, the central bank said on its website. Cetes, as the notes are known, drew bids of 37 billion pesos, or 5.3 times the amount offered. The bid-to- cover ratio, a gauge of demand that measures the number of bids divided by bids accepted, was 5.3 times, the highest since November. The zero-coupon bills yield 4.64 percent, or 445 basis points more than similar-maturity U.S. government debt.

Slowing economic growth is keeping inflation near a five- year low, prompting traders on July 19 to push back estimates for rate increases for a tenth time this year. Banco de Mexico, the only central bank in a major Latin American country to leave borrowing costs unchanged in the past year, will wait at least until March to raise the key rate from 4.5 percent, futures trading shows. Brazil’s central bank boosted its rate 175 basis points, or 1.75 percentage point, this year to 12.5 percent.

Mexico’s “central bank is comfortable with the inflation trajectory,” Jaime Lazaro, who helps manage $39.5 billion at BBVA Bancomer SA, said in an interview at Bloomberg’s Mexico City office on July 25. “The possibility of an increase in rates has to go probably until March or April of 2012. If growth doesn’t return, it could probably be a little longer.”

Growth Outlook

In April, traders expected a rate increase as soon as July.

Annual inflation slowed to 3.28 percent in June from 3.69 percent a year earlier, as food prices tumbled the most in six years. The rate touched a five-year low of 3.04 percent in March. Consumer prices in Brazil, the region’s biggest economy, rose at annual rate of 6.75 percent in mid-July, the fastest in six years.

Mexico economic growth is easing as demand weakens from the U.S., the destination for 80 percent of the Latin American country’s exports. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America-Merrill Lynch cut forecasts for growth in the U.S. to 2.5 percent this quarter, down from as much as 3.25 percent.

Mexican central bankers led by Governor Agustin Carstens said in the minutes of their July 8 meeting that “even when the risks to lower growth have increased, the balance of inflation risks have improved.”

Press officials at the central bank and finance ministry didn’t immediately return calls for comment.


“The central bank has communicated that rates will remain low for longer than they expected and that gives investors confidence to invest in longer maturities,” said Javier Belaunzaran, who helps manage about 40 billion pesos at Interacciones Casa de Bolsa SA in Mexico City. “The response to the investor demand has been to increase the auctions.”

An agreement to raise the debt limit in the U.S. would bolster growth in the world’s biggest economy, fueling inflation in Mexico and prompting traders to move forward a rate increase, said Alejandro Urbina, who oversees $800 million of emerging- market debt at Silva Capital Management LLC.

Republicans and Democrats in Congress are working to round up votes for rival debt plans aimed at averting a potential U.S. default on Aug. 2.

“If an agreement is reached on the debt ceiling in the U.S., the market is going to start focusing on growth again,” Urbina said in a telephone interview. “One trusts that a recovery in the U.S. would spur a recovery in Mexico, leading investors to think more about the link between inflation and growth and when the central banks will raise rates.”

Yield Spread

Yields on futures contracts for the 28-day TIIE interbank rate due in April fell 2 basis points to 5.04 percent today, indicating traders expect the central bank to raise benchmark borrowing costs that month.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed two basis points to 129, according to JPMorgan Chase & Co.

The cost to protect Mexican debt against non-payment for five years rose 1 basis point to 112, 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 fell 0.2 percent to 11.6459 per U.S. dollar.

Rate Differential

The rally in the peso and record-low interest rates in the U.S. will keep spurring demand for Mexico’s bills, Interacciones’s Belaunzaran said.

The benchmark U.S. overnight rate is between zero and 0.25 percent, or more than 400 basis points below Mexico’s benchmark borrowing costs.

Foreigners held 32 percent of Mexican bills on July 15, up from 21 percent on June 20, according to the central bank.

“There are so many extra dollars in the market and the strengthening currency gives you an interest rate that is much higher than you can find” in the U.S., Belaunzaran said.

-- Editors: Lester Pimentel, Jonathan Roeder

To contact the reporter on this story: Andres R. Martinez in Mexico City at

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

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