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 Business News | July 2005 
Borrowing Costs Hit Lowest So Far In 2005
 Wire services
Mexico paid the lowest rate this year to borrow pesos for seven years at an auction, as traders bet slowing inflation will prompt the central bank to begin cutting interest rates.
The government paid an average yield of 9.1 percent to sell 2.2 billion pesos (US206 million) of notes due December 2011, compared with 9.46 percent when Mexico last sold bonds of that maturity June 14. Today's sevenyear yield is less than the overnight loan rate of 9.75 percent and the lowest this year.
Consumer prices in Mexico, Latin America's biggest economy, fell in June for a second straight month, helping lower the annual inflation rate to 4.3 percent from 4.6 percent in April. Inflation will be below the upper end of the central bank's target of 2 percent to 4 percent by September, which would allow for a rate cut, said Salvador Moreno from ING Groep NV.
"Investors are anticipating that the central bank will start cutting interest rates soon," Moreno, an ING economist, said in a telephone interview from Mexico City. "Bond yields keep falling also because there's a lot of liquidity." The yield on the nation's seven-year bond has fallen consistently since May 2, when it was at 10.49 percent. An interest-rate reduction by Banco de Mexico would begin to reverse 12 increases that doubled the overnight lending rate to 9.75 percent from 5.5 percent in February 2004.
Mexico raised a total 18.8 billion pesos today at an auction by selling debt with maturities from one month to seven years. The average yield on the securities sold ranged from 9.61 percent to 9.1 percent, the central bank said.
Currency Rises Fourth Day In Five
The peso rose for the fourth day in five as the highest lending rates in almost 2 1/2 years attract rising levels of international investment.
"Until the central bank begins to cut rates, the high yields in Mexico will keep attracting people to the peso," said Suhas Ketkar, a Latin America economist with Royal Bank of Scotland Plc., in a phone interview from Greenwich, Connecticut.
The Bank of Mexico raised the benchmark loan rate 12 times in 14 months to March, doubling the overnight rate to 9.75 percent that while damping economic growth has also slowed the annual inflation rate to 4.33 percent through June.
The peso rose 0.2 percent to 10.6925 pesos per U.S. dollar on Wednesday from 10.7125 pesos late Tuesday, increasing its gain in 2005 to 4.3 percent, the secondbest performance against the dollar of the 16 major currencies after Brazil's real.
Earlier, it rose as much as 0.4 percent to 10.6650 pesos per U.S. dollar. On the Chicago Mercantile Exchange, the peso future contract for September delivery rose 0.3 percent to 9.2475 cents from 9.2200 cents Tuesday.
Ketkar said the peso may strengthen to 10.60 pesos per U.S. dollar before slowing inflation prompts the central bank to begin cutting the benchmark lending rate by late August.
The difference in yield between Mexico's 10-year, 9 1/2 percent peso-denominated treasury note that matures December 2014 and the U.S. 10-year Treasury note that matures a month earlier has narrowed 1.46 percentage points since May 2 from 6.50 percentage points to 5.04 percentage points on Wednesday. |
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