Bond traders are betting that the biggest surge in Mexican consumer prices in almost two years will be short-lived.
The yield gap between Mexican fixed-rate bonds due 2013 and similar-maturity notes tied to inflation, a gauge of investors' expectations for annual price increases, has fallen five basis points to 3.48 percentage points since a December 8 government report showed consumer prices soared 1.08 per cent in November. The US break-even rate rose four basis points, or 0.04 percentage points, over that time to 1.35 percentage points.
Inflation expectations are falling in part because investors are confident the central bank, known as Banxico, will take measures if needed to contain price increases, said Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc. While the November price surge drove annual inflation up to 3.5 per cent, the rate remains within Mexico's target range of two per cent to four per cent. Brazil's 6.6 per cent rate is above its target range.
"There has not been a change in the view traders have of Banxico," Tuesta said in a telephone interview. "They always believe that the Mexican central bank will be fighting to keep long-term inflation from going anywhere close to four per cent."
Mexico's break-even rate touched a six-month low of 3.46 percentage points on December 9. Yields on fixed-rate peso bonds maturing in December 2013 have climbed 20 basis points since the inflation report release to 4.96 per cent, according to data compiled by Bloomberg. The yields fell 72 basis points in 2011.
Yields on similar-maturity inflation-linked bonds rose 26 basis points since the report to 1.48 per cent. The yields dropped 34 basis points last year.
The government's removal of seasonal electricity subsidies helped fuel the 1.08 per cent consumer price jump in November, the biggest monthly rise since January 2010. Prices rose 0.51 per cent in the first half of Dec-ember, an increase that exceeded the estimates of all 16 economists surveyed by Bloomberg.
The inflation pickup prompted investors to scrap wagers that the central bank, led by Governor Agustin Carstens, will cut borrowing costs this year to bolster economic growth, trading in futures contracts shows.
A press official at the central bank didn't respond to a request for comment.