Bloomberg News

Mexico Peso Bonds Rally After Central Bank Signals Possible Cut

October 14, 2011

Oct. 14 (Bloomberg) -- Mexican peso bond yields dropped the most in more than a week after policy makers led by central bank Governor Agustin Carstens signaled they may lower borrowing costs should circumstances warrant.

The yield on Mexico’s benchmark peso-denominated bonds due in 2024 fell 10 basis points, or 0.1 percentage point, to 6.43 percent at the close in Mexico City, according to data compiled by Bloomberg. The price of the security rose 1.01 centavo to 131.60 centavos per peso. It’s the biggest daily rally since Oct. 5, when yields tumbled 18 basis points. The yield dropped 30 basis points this week.

Mexico’s central bank kept its benchmark interest rate unchanged today after the peso’s 11 percent decline last month. In leaving the overnight rate at 4.50 percent for a 22nd straight meeting, policy makers led by Carstens said in a statement that they “will remain alert to global economic growth perspectives and the possible implications for Mexico’s economy, which in the context of extensive monetary easing in the largest industrialized countries, subsequently could make it appropriate to relax monetary policy” in Mexico.

The bond’s rally “is clearly the market telling you that it’s starting to price in more monetary easing and maybe more near-term monetary easing,” Bret Rosen, Latin America strategist at Standard Chartered Bank in New York, said in a telephone interview. “It was the dovishness of the statement, them basically telling the market that we’re ready to cut and perhaps cut aggressively quite a bit over the next six months.”

Peso Gain

The Mexican peso advanced for a second week amid rising optimism European officials will agree on a plan to resolve the region’s debt crisis.

The peso strengthened 1.4 percent today to 13.2430 per U.S. dollar, from 13.4280. The gain brought its weekly advance to 1.6 percent. The currency advanced 3.3 percent last week.

Elements of the European rescue plan emerged as finance ministers and central bankers from the Group of 20 began talks in Paris, seeking ways to end the sovereign debt crisis. Officials are considering writedowns of as much as 50 percent on Greek bonds, a backstop for banks and continued central bank bond purchases as key planks in a revamped strategy to combat the debt crisis, people familiar with the discussions said.

‘More Confidence’

“It’s a little more confidence” in a European deal that’s driving the peso’s gain, Win Thin, the global head of emerging- markets currency strategy at Brown Brothers Harriman & Co. in New York, said by phone. “Obviously, we swung too pessimistic back in August, September. Now I think we’re swinging a little too optimistic. I still like the emerging-market story, but I don’t think we’re out of the woods yet.”

The peso also increased today after data showed retail sales in the U.S. rose more than forecast in September, easing concern slumping confidence and scant hiring will derail the biggest part of the U.S. economy. About 80 percent of Mexico’s exports go to the U.S.

Traders triggered $50 million in dollar options today, the central bank said on its website. The bank has been buying as much as $600 million through the options every month since March 2010 to bolster foreign reserves. The options allow the central bank to accumulate dollars, insuring against outflows of capital and limiting the peso’s appreciation.

--With assistance from James G. Neuger in Brussels. Editors: Marie-France Han, Glenn J. Kalinoski

To contact the reporter on this story: Benjamin Bain in New York at bbain2@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net

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


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