Bloomberg News

Avocado Plunge Helps Sap Demand for CPI Bonds: Mexico Credit

October 10, 2011

Oct. 10 (Bloomberg) -- Bond investors are cutting their Mexican inflation forecasts to a four-month low as the global economic slump and falling vegetable prices restrain cost-of- living increases.

The yield gap between inflation-linked debt due in 2013 and similar-maturity fixed-rate bonds, a gauge of investor expectations for price increases, has fallen 27 basis points this month to 357 on Oct. 7, the lowest since June, according to data compiled by Bloomberg. The so-called breakeven rate in Brazil climbed 10 basis points, or 0.1 percentage point, during the same period, while in Colombia it rose 29.

Flagging growth in the U.S., Mexico’s biggest trading partner, is helping drive inflation in Latin America’s second- biggest economy to an almost five-year low. The national statistics agency said Oct. 7 prices rose at an annual rate of 3.14 percent in September, less than economists forecast and half the pace in Brazil. Alberto Bernal, head of fixed-income research for Bulltick Capital Markets, said he slashed his year- end inflation forecast to 2.8 percent from 3.5 percent after the report.

“It is very clear that we’re seeing subpar economic growth, and when you have subpar economic growth in your largest trading partner, there are downside risks to your economy,” Bernal said in a telephone interview from Miami. “This was a major adjustment.”

Yields on fixed-rate bonds due in 2013 fell 23 basis points last week to 4.53 percent, according to data compiled by Bloomberg. The yield on inflation-linked bonds due the same year, whose coupons are linked to the consumer price index, rose four basis points to 0.96 percent during the same period.

Avocado Prices

Mexico’s inflation rate in September was the lowest since March’s 3.04 percent. A 1.5 percent decline in fruit and vegetable prices helped contain inflation in Mexico last month, the government said. Avocado prices sank 32 percent, shaving 0.07 percentage point off the consumer price index.

Mexico was the world’s top producer of avocados in 2009, according to the most recent data available from the United Nations Food and Agriculture Organization, and the fruit is an important part of the national cuisine.

U.S. economic growth will slow to 1.6 percent this year from 3 percent in 2010, according to the median estimate of 66 analysts surveyed by Bloomberg. Mexico’s gross domestic product will grow 4 percent this year after expanding 5.4 percent in 2010, central bank Governor Agustin Carstens said Sept. 8.

“Inflation continues to perform favorably,” Alejandro Padilla, a debt strategist at Grupo Financiero Banorte-Ixe, said in a telephone interview from Mexico City. “The fact that the economy is having a weak recovery has prevented producers and retailers from raising prices. Consumers don’t have the money to spend. They don’t even have the purchasing power.”

Default Swaps

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries fell two basis points to 248 at 5:17 p.m. Mexico City time, according to JPMorgan’s EMBI Global index.

The cost to protect Mexican debt against non-payment for five years dropped three basis points to 178 today, 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 strengthened 1.7 percent to 13.2374 per U.S. dollar today, from 13.4598 on Oct. 7. It’s down 11.2 percent in the past three months.

Inflation will quicken to 3.89 percent by the end of the year as deepening declines in the peso drive up the cost of imports, according to Benito Berber, a strategist at Nomura Securities Inc. in New York. Economists in a monthly central bank survey published Oct. 3 forecast inflation will end the year at 3.34 percent. They predicted a rate of 3.52 percent in August.

Rate Bets

Slowing inflation will prompt the central bank to lower interest rates to spur economic growth, Bulltick’s Bernal said. He forecasts policy makers will cut the benchmark rate by 25 basis points to 4.25 percent before the end of the year.

Yields on futures contracts for the 28-day TIIE interbank rate due in December rose one basis point today to 4.68 percent, indicating traders expect the central bank to cut interest rates this year.

A press official at the central bank didn’t respond to an e-mail and telephone message seeking comment.

“I’m sure that Banxico is going to cut rates very soon in large part because of the inflation scenario,” Bernal said in a telephone interview.

--Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Jonathan J. Levin at jlevin20@bloomberg.net

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


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