The yield gap between government debt tied to inflation and fixed-rate notes, a gauge of investor expectations for annual price increases over the next three and a half years, tumbled 116 basis points since March 7 to a four-month low of 3.5 percentage points. As concern about inflation wanes, traders are pushing back their estimates for when Carstens, a candidate to head the International Monetary Fund, will begin raising the benchmark rate to December, futures trading shows.
While policy makers from Brazil to Chile have been ratcheting up borrowing costs over the past year to quell surging inflation, Carstens has held Mexico’s key rate at a record low 4.5 percent as a bet that the economic expansion wouldn’t trigger a jump in consumer prices. Annual inflation slowed to 3.3 percent in mid-May from 4.4 percent in 2010 and touched a five-year low of 3.04 percent in March.
Carstens’s “credibility has been enhanced,” Pablo Cisilino, who helps manage $22 billion in emerging-market debt at Stone Harbor Investment in New York, said in a telephone interview. “Carstens came out and said we’re going to stay put and inflation is not going to pick up, it’s going to come down. Something that you’ve been predicting happens, your credibility gets enhanced.”
Today’s Meeting
Banco de Mexico’s board, led by Carstens, kept the overnight rate at 4.5 percent at a nineteenth straight meeting today. The decision matched the forecast of all 15 economists surveyed by Bloomberg.
Yields on 28-day interbank rate futures due in December, known as TIIE, has declined 34 basis points, or 0.34 percentage point, in the past month to 5.03 percent, indicating traders are betting the central bank will wait until that month to increase the key rate. As recently as April 4, they predicted an increase by July, according to data compiled by Bloomberg.
The yield on Mexico’s 9.5 percent peso bonds due 2014 have dropped 75 basis points from a 10-month high on March 7 to 5.97 percent, helping narrow the gap with inflation-linked bonds, according to data compiled by Bloomberg. The 116-basis point drop in the yield differential between the two securities, known as the breakeven rate, compares with declines of 52 basis points in Colombia and 34 in Brazil in the same period.
“It definitely says that the market is perfectly happy with the way that Carstens is conducting monetary policy,” Kieran Curtis, who helps manage more than $3 billion of emerging-market assets, including peso debt, at Aviva Investors in London, said in a telephone interview. “No change for still a reasonable period of time is quite a reasonable sort of policy outlook to expect.”
‘Well-Behaved’
Policy makers on May 11 kept their annual inflation forecast of 3 percent to 4 percent for 2011 while raising growth estimates. The economy will expand as much as 5 percent, up from a previous forecast of up to 4.8 percent, the central bank in its quarterly inflation report.
“Taking everything together, inflationary expectations are relatively well-behaved,” Carstens, who served as finance minister from 2006 to 2009, told reporters in Mexico City on May 11.
The central bank declined to comment further in an e-mailed statement yesterday.
Mexico’s consumer prices fell for the first time in 10 months in April as housing costs tumbled. Prices fell 0.01 percent in April from a month earlier while rising 3.36 percent from a year earlier, the central bank reported May 9. Prices in the first two weeks of May declined 0.75 percent. The median forecast in a Bloomberg survey of 12 analysts was for a 0.41 percent drop.
‘Weak’ Growth
The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries was unchanged today at 147 basis points, according to JPMorgan Chase & Co.
The peso rose 0.6 percent to 11.6035 per U.S. dollar.
Yields on futures contracts for the 28-day interbank rate due in October fell one basis point to 4.91 percent.
The cost to protect Mexican debt against non-payment for five years fell one basis point to 105, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
“Weak” economic growth is more responsible for the decline in consumer prices in Mexico than Carstens, said Benito Berber, Latin America strategist at Nomura Securities.
France’s Lagarde
Gross domestic product grew 4.6 percent in the first quarter, less than the 5 percent median forecast in a Bloomberg survey of 17 analysts, the government said in a report on May 19. TheU.S. economy, which buys about 80 percent of Mexico’s exports, expanded at a 1.8 percent annual rate in the first quarter, less than the 2.2 percent median forecast in a Bloomberg News survey.
“The economy is weak,” Berber said in a telephone interview in New York. “The recent collapse in break-even inflation is just because people realize growth is not there.”
Mexico has nominated Carstens, who was deputy managing director at the IMF from 2003 to 2006, to replace Dominique Strauss-Kahn, who resigned as head of the organization last week to defend himself against criminal charges including attempted rape. French Finance MinisterChristine Lagarde, who is also seeking the top job at the Washington-based Fund, has won endorsements from European countries including the U.K., Germany and Sweden.
‘Model’ Country
Carstens said in a May 24 interview on Bloomberg Television that it was too early to say which countries will back his nomination and that he has “a chance” of winning the race.
Stone Harbor’s Cisilino said Carstens would be a “great” IMF head because of his experience helping Mexico recover from past crises. The economy last year rebounded from a 6.1 percent contraction in 2009, the worst since 1995, when a devaluation of the peso sparked capital outflows across the region in what became known as the Tequila Crisis.
“Mexico — it’s a model, they’ve been through every crisis you can imagine in emerging markets,” Cisilino said. “They have so much experience. It would be wonderful. They should be a model for a lot of guys in emerging markets. He would be a wonderful head of the IMF.”
source from: bloomberg
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