Mexican Peso, Local Bonds Decline as Demand for Risk Wanes

By Valerie Rota

Sept. 5 (Bloomberg) -- Mexico's peso weakened the most in a week and local-currency bonds fell on concern a rout in international credit markets will slow global growth and cut demand for exports from emerging-market countries.

The peso's decline followed a drop in global stocks and most developing-nation currencies. Concern losses on securities linked to U.S. subprime mortgages will spread has led investors to trim purchases of riskier assets.

``There is still a lot of risk out there,'' said Christian Stracke, an emerging-market strategist at CreditSights Inc. in London.

The peso weakened 0.5 percent to 11.0867 per dollar at 11:12 a.m. in New York and earlier fell as much as 0.6 percent, the most since Aug. 28.

The yield on the 10 percent security due December 2024 rose 5 basis points, or 0.05 percentage point, to 7.82 percent. The price, which moves inversely to the yield, fell 0.58 centavo to 120.57 centavos per peso, according to Santander Central Hispano SA.

The government's benchmark bond snapped a four-day rally that was fueled by comments from opposition legislators suggesting congress will approve a bill this week to raise the country's tax collection, which would help wean Mexico off its dependence on income from oil exports.

Losses in Mexican assets ``would be worse were it not for progress on the tax bill,'' Stracke said.

President Felipe Calderon is pushing to get the bill approved this week so the government can include changes to the tax code in next's year budget plan. The government has until Sept. 8 to submit its budget bill.

The tax bill may fuel faster inflation should legislators approve a provision to levy a tax on gasoline and diesel, according to Banco UBS Pactual economist Guillermo Aboumrad. Mexico's inflation rate could rise by 0.4 percentage point in 2008, Mexico-City based Aboumrad wrote in a research note today.

Lawmakers from Calderon's party presented to congress this week a plan to tax fuel by 5.5 percent as part of the government's proposal.