Lime Price Plunge Has Traders Trimming Inflation Estimates: Mexico Credit

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  • Posted on April 25, 2011

    Mexican bonds investors are paring inflation bets from a 14-month high after consumer prices rose less than forecast over the past two months.

    The yield gap between inflation-linked debt due in 2014 and similar-maturity fixed-rate bonds, a gauge of investor expectations for annual price increases over the next three years, shrank to 3.85 percent from 4.65 percent on March 7, according to data compiled by Bloomberg. The so-called breakeven rate in Chile narrowed 17 basis points during the same period to 4.05 percent while in Brazil it climbed 8 to 6.17 percent.

    Bond investors are paring their inflation bets as the slowdown in consumer price increases prompts central bank Governor Agustin Carstens to keep benchmark interest rates at a record low 4.5 percent. Prices fell 0.09 percent in the first half of April, more than economists’ 0.03 percent median forecast in a Bloomberg survey, as prices for limes, a staple in the Mexican diet, plunged for a second month. In March, consumer prices rose 0.19 percent, less than the 0.3 percent estimate.

    “Inflation has surprised on the downside,” Pablo Cisilino, who helps manage $22 billion in emerging-market debt at Stone Harbor Investment in New York, said in a telephone interview. Cisilino said he began switching to Mexican fixed- rate debt from bonds tied to consumer prices in the past month.

    The yield on Mexico’s 9.5 percent peso bonds due in 2014 tumbled 43 basis points from a 11-month high on March 7 to 6.28 percent, according to data compiled by Bloomberg. Yields on inflation-linked bonds due the same year climbed 41 basis points from a four-month low on Feb. 28 to 2.03.

    ‘Gentle Recovery’

    Inflation in the 12 months through mid-April was 3.2 percent, holding near a four-year low set in March and half the 6.4 percent pace in Brazil, the region’s largest economy. The cost of electricity, internet service and cars also declined in the first half of April along with food items including limes, carrots and eggs, Mexico’s central bank said April 20. Lime prices fell 18 percent in the first half of April after sinking 39 percent in March.

    “Mexico is not really the place people should run for inflation protection,” Guilherme Maciel De Barros, who oversees $1.1 billion in emerging-market assets at Lombard Odier Darier Hentsch & Cie, said in a telephone interview from Geneva, Switzerland. “We are going to have a couple of months with inflation prints that are not that worrying. Mexico is very far from overheating. It has been a very gentle recovery.”

    Jobless Rate

    Latin America’s second-biggest economy will grow as much as 5 percent this year after expanding 5.5 percent in 2010, the fastest pace in a decade, Finance Minister Ernesto Cordero said last month. The economy rebounded from a 6.1 percent contraction in 2009, the worst since 1995, as the recovery in the U.S. drove exports to a record $298 billion.

    Mexico’s expansion last year compared with average 6.1 percent growth in Latin America, according to the International Monetary Fund.

    While rising exports are propelling growth in Mexico, unemployment and slower private investment growth are helping keep inflation in check, Carstens said at a banking convention in Acapulco, Mexico, on April 7. The jobless rate was 4.6 percent in March, compared with 3.2 percent in May 2008, according to the national statistics agency.

    “Mexico’s advantage is that it provided almost no stimulus, had the deepest recession and the slowest recovery,” Siobhan Morden, head of strategy for Latin America at RBS Securities Inc., said in a telephone interview. “Inflation risk is quite low.”

    ‘Full Potential’

    Jimena Zuniga, a Latin American economist at Barclays Plc in New York, estimates inflation will quicken to 4 percent this year as companies struggle to meet rising demand, above the 3.85 percent forecast in a survey of economists released by Citigroup Inc.’s Banamex unit. The central bank targets annual inflation of 3 percent.

    “Inflation has to go to 4 percent, given that the economy is nearing its full potential,” Zuniga said in a telephone interview. “It’s going to rise and you can see that it is already rising on the margins.”

    Mexico is the only major Latin American nation not to raise interest rates in the past year. Carstens held the benchmark rate at 4.5 percent this month for a record 18th consecutive meeting.

    Yields on futures contracts for the 28-day interbank rate due in September fell 1 basis point last week to 5.05 percent, indicating traders expect a rate increase as soon as that month. As recently as April 11, they predicted Carstens would raise rates in August.

    ‘Very Cheap’

    The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries fell 2 basis points last week to 135, according to JPMorgan.

    The cost to protect Mexican debt against non-payment for five years rose 2 basis points to 102, according to CMA. Credit- default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

    The peso gained 0.5 percent to 11.6048 per U.S. dollar.

    Concern inflation would accelerate drove yields on Mexico’s benchmark peso bonds due in 2024 to a 12-month high of 7.99 percent on March 3. Yields have tumbled since to 7.5 percent, according to data compiled by Banco Santander SA.

    “From the beginning of the year, we were getting a little bit ahead of ourselves,” Lombard Odier’s Maciel De Barros said. “People are now more comfortable about the local curve. The nominal curve was very cheap.”

    To contact the reporters on this story: Andres R. Martinez in Mexico City at; Ye Xie in New York at

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


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