Traders Bet Rising Interest Rates Delayed as Inflation Ebbs: Mexico Credit

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  • Postado em 12 de abril, 2011

    Traders are betting for the first time in four months that interest-rate increases will be delayed after inflation slowed and Mexican central bank Governor Agustin Carstens signaled he’ll keep borrowing costs unchanged.

    Futures contracts for the 28-day interbank rate, known as TIIE, show investors expect policy makers will increase the key rate from a record low of 4.5 percent as soon as August, according to data compiled by Bloomberg. As recently as April 4, they predicted Carstens would raise rates in July. In Brazil, where the central bank has boosted borrowing costs 100 basis points this year, futures indicate policy makers will increase the benchmark rate another 25 to 12 percent this month.

    Mexico is the only major Latin American country that hasn’t raised interest rates in the past year as consumer prices increase at the third-slowest pace in the region after Chile and Peru. While rising exports are fueling the expansion in Latin America’s second-largest economy, unemployment and slower private investment growth are helping keep inflation in check, Carstens said at a banking convention in Acapulco, Mexico, on April 7.

    “We are seeing better signs of domestic demand recovery, but we still don’t think that’s going to force the hand of authorities to hike in 2011,” Gray Newman, chief Latin America economist at Morgan Stanley in New York, said in a telephone interview. “You can really divide up the region into two camps: the first camp is Mexico and the second camp is everyone else. In Argentina, Chile, Colombia, Peru, Brazil there’s a tremendous boom in private consumption. Mexico is the exception.”

    Benchmark Yields

    The yield on Mexico’s benchmark peso bonds due in 2021 fell 15 basis points, or 0.15 percentage point, last week and touched a two-month low of 7.43 percent yesterday, according to Banco Santander SA. The yield compares with 3.58 percent for 10-year U.S. Treasuries and 12.83 percent for similar-maturity Brazilian bonds denominated in reais.

    Inflation in Mexico slowed to 3.04 percent in the 12 months through March, the lowest level since May 2006. The rate is half the 6.3 percent recorded in Brazil, the region’s largest economy. Consumer prices in the U.S. rose 2.1 percent in February from a year earlier.

    “The Mexican economy still has enough slack to grow as it has been without generating inflationary pressures,” Carstens said on April 7, citing the country’s unemployment rate.

    Mexico’s jobless rate was 5.38 percent in February, compared with 3.24 percent in May 2008, according to the national statistics agency.


    Mexico’s 6.1 percent contraction in 2009, the worst since 1995, means the economy still isn’t at levels from before the global financial crisis, according to Benito Berber, an emerging-market analyst at Nomura Securities in New York. Berber predicts the central bank won’t raise rates until the first three months of next year, in line with the median forecast in a survey of economists by Citigroup Inc.’s Banamex unit.

    “People are making a mistake when they compare Mexico to other countries in the region,” Berber said in a telephone interview. “Mexico never had the consumer demand they had. You have to remember that while Mexico contracted these other countries didn’t.”

    The International Monetary Fund and Mexico’s government raised their forecasts for economic growth in the past week. Gross domestic product will grow 4.6 percent this year after expanding 5.5 percent in 2010, the fastest in a decade, the IMF said yesterday. It previously predicted the economy would grow 4.2 percent.


    Finance Minister Ernesto Cordero said Mexico may expand as much as 5 percent this year, up from a previous estimate of 4 percent, on U.S. demand for automobiles and other exports. The rebound in the U.S. last year helped drive Mexican exports to a record $298 billion.

    The central bank declined to comment because of its policy meeting this week, according to an official in the bank’s press office.

    Banco de Mexico will likely keep the lending rate unchanged at its meeting on April 15, according to the median estimate of 14 economists in a Bloomberg survey.

    Yields on the interbank rate futures contract maturing in July fell 4 basis points to 4.96 percent last week, indicating traders no longer expect a rate increase that month. The yield on the August contract fell 4 to 5 percent. They were both unchanged yesterday. In the past five years, the gap between the 28-day TIIE and the overnight rate has averaged 36 basis points.

    Yield Spread

    The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries widened 2 basis points yesterday to 129, according to JPMorgan Chase & Co.

    The cost to protect Mexican debt against non-payment for five years rose 1 basis point to 98, 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 dropped 0.2 percent to 11.7496 per dollar.

    Inflation will quicken to 4.1 percent by August, increasing pressure on Carstens to raise borrowing costs, according to Alonso Cervera, chief Latin America economist at Credit Suisse Group AG.

    “If that materializes, there may be pressure on the central bank to react to that,” Cervera said in a telephone interview from Mexico City. “The central bank may be forced to do something as early as August.”

    Breakeven Rates

    The yield gap between debt tied to inflation and fixed-rate bonds, a gauge of investor expectations for annual prices increases over the next five years, was 3.9 percent yesterday, according to data compiled by Bloomberg. The central bank has a target range of 2 percent to 4 percent.

    In Brazil, the so-called breakeven rate over the next two years was 6.81 percent. The government targets inflation of 4.5 percent, plus or minus 2 percentage points.

    “The mistake is to simply place Mexico in the same category as the rest of the region,” Morgan Stanley’s Newman said. “Mexico is the country whose performance looks most like a developed market, and it happens to be sitting in an emerging- markets region called Latin America.”

    To contact the reporters on this story: Andres R. Martinez in Mexico City at; To contact the reporter on this story: Jens Erik Gould in Mexico City at


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