Mexico's Peso Plunges to Record Low on Global Economic Concerns

By Valerie Rota

Oct. 22 (Bloomberg) -- Mexico's peso fell near a record low and yields on the country's benchmark local-currency bonds surged to their highest in more than three years, on mounting concern the global economic slump is deepening.

The peso weakened as much as 5.1 percent as investors pulled out of emerging markets. Banco de Mexico failed to stem a drop in the peso after it purchased $400 million worth of the Mexican currency, adding to the $11.6 billion of pesos it has bought over the past two weeks to stem a rout.

``There is concern that foreign investors will exit their holdings'' of peso bonds, said Agustin Villarreal, a bond trader in Mexico City at Invex Casa de Bolsa SA. ``We're seeing very little liquidity in the long end of the yield curve.''

The peso dropped 4.6 percent to 13.879 per U.S. dollar at 5 p.m. New York time, from 13.2366 yesterday. It was the weakest closing price since Jan. 4, 1971, when Bloomberg began tracking the data. It hit an all-time intraday low of 14.2927 on Oct. 8. Banco de Mexico today sold dollars at an average price of 13.4355 pesos.

Mexico's peso fell for a fourth straight day and has lost nearly a third of its value since reaching a six-year high on Aug. 4. Banco de Mexico has bought $12 billion worth of pesos this month to shore up the currency after it plunged to a record intra-day low of 14.2927 on Oct. 8.

Corporate Losses

The peso's slump has hurt Mexican companies. Controladora Comercial Mexican SAB, Mexico's third-largest retailer declared bankruptcy on Oct. 9 after failing to raise cash to meet margin calls on losses of $1.08 billion of currency derivates. Companies such as Cemex SAB, North America's largest cement maker, and furniture retailer Coppel SA failed to sell all of the commercial paper they offered for sale last week.

``There is an internal credit restriction,'' said Jaime Ascencio, a fixed-income strategist at Mexico City-based Actinver SA, the country's biggest independent money manager. This ``is a crisis of confidence. Investors are wondering why they should buy if there is no guarantee they'll get their money back.''

Declines in the price of oil, Mexico's biggest source of dollar revenues, also fueled losses in the peso. Crude oil for November delivery fell 5.8 percent to $66.75 a barrel on the New York Mercantile Exchange.

Mexico will reduce its spending plan for next year if oil prices fall another $7 to $8 a barrel, as crude is already below the country's $70 a barrel budgeted price for 2009, Finance Minister Agustin Carstens said on Mexico City-based Radio Formula today. The Mexican mix of crude oil for export sold for an average of $58.92 yesterday.

Benchmark Bond

Yields on Mexico's 10 percent security due in December 2024, the country's most-traded bond in pesos, climbed 71 basis points, or 0.71 percentage point, to 10.65 percent. The yield surged to its highest since May 2005. The bond's price fell 5.44 centavos to 94.97 centavos per peso, according to Banco Santander SA.

Foreigners own one-fourth of the country's fixed-rate securities in pesos maturing in a year or more, making them Mexico's biggest holders of the debt. Foreign holdings of Mexican bonds fell 1.6 percent to 282 billion pesos ($21 billion) as of Oct. 13 from the previous month, according to the latest data posted on Banco de Mexico's Web site. They are down 4.8 percent from a record high reached on Aug. 12.

Expectations that a central bank report tomorrow will show inflation slowed in the first half of this month failed to stem losses in Mexican fixed-rate bonds.

Inflation likely decelerated to 0.34 percent in the first two weeks of October from 0.44 percent in the same period a month ago, according to the median of 15 forecasts in a Bloomberg News survey. Consumer prices excluding fresh food and energy items increased 0.18 percent in the first half of the month, less than the 0.41 percent increase in the first half of August, the survey shows.

To contact the reporter on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net.