Mexico's Bonds Increase as Rate Outlook Eases Inflation Concern

By Andrea Jaramillo

July 24 (Bloomberg) -- Mexico's benchmark peso bonds rose to a five-week high amid speculation the central bank will contain inflation by raising borrowing costs in August.

Bonds rallied after the central bank said consumer prices rose 0.38 percent in the first half of July, above the 0.25 percent median forecast in a Bloomberg survey. Higher-than- expected inflation increases the chances the central bank will lift its key rate, according to Alberto Bernal, head of emerging-market fixed-income research at Bulltick Capital Markets in Miami.

``The long end of the bond curve is flattening as expectations Banco de Mexico will move boost credibility that it will contain inflation down the road,'' Bernal said.

Yields on Mexico's 10 percent bond due December 2024, the country's most-traded security, fell 8 basis points, or 0.08 percentage point, to 8.95 percent at 5:27 p.m. New York time. The bond's price jumped to its highest since June 18, rising 0.71 centavo to 108.98 centavos per peso, according to Banco Santander SA.

Mexico's central bank raised the benchmark interest rate on July 18 to 8 percent, its highest since December 2005. Policy makers next meet on Aug. 15. Bernal forecasts policy makers will lift the rate for a third straight month to 8.25 percent.

Annual inflation rose to 5.26 percent in June from 4.95 percent in May. The central bank targets inflation of 3 percent, plus or minus 1 percentage point.

The peso fell 0.3 percent to 10.0335 per dollar, compared with 10.0084 yesterday.

``If tightening expectations rise while the Mexican economy holds up well, the peso is likely to break the important 10 level soon,'' Win Thin, a New York-based currency strategist at Brown Brothers Harriman & Co., wrote in a report to clients today.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net