Colombia Peso Bond Yields Rise on Bets Rain Will Stoke Inflation

Colombia’s peso bonds fell, pushing yields to their steepest rise in two weeks, amid concern inflation will quicken this month as heavier than average rain leads to an increase in food prices.

The yield on Colombia’s benchmark 10 percent bonds due in July 2.024 rose six basis point, or 0.06 percentage point, to 7.52 percent. 

The bond’s price dropped 0.543 centavo to 119.839 centavos per peso.

“The market is beginning to show signs of concern regarding inflation,” said Daniel Escobar, an analyst at brokerage Global Securities in Bogota. 

“Inflation may quicken beyond the central bank’s 4 percent target, but we see this as temporary and it should fall within the target by year-end.”

Escobar predicts an increase in food prices this month will lead annual inflation to quicken to 4.03 percent in October before ending the year at 3.7 percent. 

The central bank targets inflation between 2 percent and 4 percent this year.

Colombia’s second rainy season began in mid September and will last through mid-December, the nation’s weather agency said in a Sept. 26 statement. 

Rain in the first half of October was equivalent to the historical average for the whole month, according to an Oct. 15 statement on the presidential website which quoted the weather agency. 

Floods last year and at the beginning of this year damaged crops and choked off farmers’ supply routes, pushing food prices higher.

Currency Trading Limit

Colombia’s consumer prices rose 0.31 percent in September from the previous month, driven by higher housing and food costs, after declining 0.03 percent in August. 

The government will release the October inflation report Nov. 5.

The gap between yields on government inflation-indexed bonds due 2013 and similar maturity fixed rate debt, a gauge of annual consumer price increase expectations known as the breakeven rate, rose to 3.36 percentage points today from 2.8 percentage points a month ago.

Economists covering the Colombian economy raised their year-end inflation forecast to 3.42 percent this month from 3.23 percent in the September survey, according to the median forecast in a central bank survey published Oct. 12.

The peso was little changed at 1,902.43 per U.S. dollar, from 1,903 yesterday. 

It has dropped 4.6 percent in the last year as concern Europe’s debt crisis is worsening prompted investors to shun higher-yielding, emerging market assets.

Colombia imposed a limit on foreign exchange trading by pension funds as it seeks to reduce the peso’s volatility after the global market sell off sparked a plunge in the currency.

Pension funds’ currency transactions over a five-day period can equal no more than 2.5 percent of their assets under management, the Finance Ministry said in a statement today. 

The measure limits trading in the spot market as well as derivatives trading, according to the statement.