By Valerie Rota Dec. 11 (Bloomberg) -- Mexico’s benchmark bonds surged to a six-month high on bets a slowing economy will curb inflation. The government’s most-traded security maturing in 2024 headed to a fourth week of gains. Annual inflation may decelerate to as slow as 3.7 percent by the end of next year from 6.3 percent this year after the government reduces the price of gas and gasoline by 5 percent in early 2009, according Alonso Cervera, a Latin America economist at Credit Suisse Group. Investors “are pricing in an improvement in inflation next year,” said Jaime Ascencio, a fixed-income analyst at Actinver SA in Mexico City. “Liquidity is coming back to the market.” Yields on Mexico’s most-traded security fell 26 basis points, or 0.26 percentage point, to 8.36 percent at 5 p.m. New York time, according to Banco Santander SA. The yield fell to the lowest since June 4. The price on the 10 percent security due December 2024 rose 2.44 centavo to 114.37 centavos per peso. Cervera expects the government to reduce the price of gasoline, estimated to be 25 percent higher than prices in the U.S., in January to “support the finances of Mexican households.” He is forecasting Mexico, which sends about 80 percent of its exports to the U.S., to grow 0.6 percent next year after expanding 1.8 percent in 2008. Banco de Mexico will cut its key rate to as low as 6.75 percent in the first half of 2009 from 8.25 percent today, New York-based Cervera wrote in a report today. Yields on the benchmark bond have fallen 3.04 percentage points from a 3 1/2-year high of 11.4 percent on Oct. 24. Government Buyback Investors yesterday sold less than a fourth of the 18 billion pesos ($1.3 billion) of securities that the government had planned to repurchase in a buyback, a week after an offer to buy 15 billion pesos lured no offers that officials were willing to accept. The government will seek to repurchase another 7 billion pesos of bonds this month, the last portion of a 40 billion peso buyback announced in October, Gerardo Rodriguez, head of public credit at the Finance Ministry, said yesterday. The government is considering including inflation-linked securities in that buyback and is “evaluating” whether to repurchase bonds next year, Rodriguez said. Rodriguez’s statements helped fuel demand for bonds as investors anticipated further offers from the government, Ascencio at Actinver said. Mexico’s peso rose to a three-week high, gaining 0.9 percent to 13.2688 per dollar, compared with 13.3956 yesterday. It earlier touched 13.1048, the strongest since Nov. 19. The peso has risen 1.5 percent in December, the second-best performance against the dollar among the six-most traded Latin American currencies after Colombia’s peso. Its gain this month follows a 19 decline in the year through November as the deepening global financial crisis sapped demand for higher- yielding assets. The peso may strengthen to 13 per dollar in coming days, said Roberto Galvan, a currency trader at Intercam Casa de Cambio SA in Mexico City. Mexican markets are closed tomorrow for a national holiday. To contact the reporter on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net.

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