Dec. 16 (Bloomberg) -- Colombia’s peso bonds advanced to a seven-month high on speculation the central bank will cut its benchmark rate as soon as this week.

The yield on the nation’s benchmark 11 percent bonds due in July 2020 fell for a 10th day, dropping 21 basis points, or 0.21 percentage point, to 10.94 percent at 2:22 p.m. New York time, according to Colombia’s stock exchange. The price rose 1.337 centavos to 100.247 centavos per peso. It earlier touched 100.311, its highest level since May.

“Bonds in the long end of the curve have had a very positive behavior on the back of expectations of lower rates and slowing inflation,” said Daniel Nino, head analyst at Bancolombia SA, the nation’s biggest bank. “Yields have fallen aggressively and the question now is how much further they’ll go.”

Yields have dropped from a record high of 13.96 percent reached on Oct. 24. Nino forecasts the benchmark bond will see a ‘technical rebound’ when it reaches 10.9 percent.

Banco de la Republica will reduce its overnight lending rate by at least a quarter percentage point on Dec. 19, according to 11 of 22 economists surveyed by Bloomberg News. The other 11 economists predict policy makers will leave the rate unchanged at a seven-year high of 10 percent. Nino says the central bank may cut its key rate to as low as 8 percent by the end of 2009.

‘Reflect Rates’

Short-term peso bonds such as those due in 2009 and 2010 should soon start pricing in rate cuts, according to Nino.

“Investors had been focusing on the longer-end judging prices were cheap and because they wanted exposure to longer maturities,” said Nino. “Beginning in 2009 we should start seeing the shorter end reflect rates.”

The price on Colombia’s futures contract for a basket of fixed-rate peso bonds for March 2009 delivery rose 0.395 centavo to 99.990 centavos per peso, according to Colombia’s stock exchange.

Colombia’s peso rose to a two-month high, leading gains in Latin American currencies, as speculation the U.S. Federal Reserve would cut its benchmark rate sparked investor appetite for emerging-market assets. Colombian markets closed before the Fed announced it cut its main rate to “a target range” of between zero and 0.25 percent.

The peso rose 1.7 percent to 2,213 per dollar when markets closed at 1 p.m. New York time, from 2,251 yesterday, according to the Colombian foreign-exchange electronic transactions system, known as SET-FX. It touched 2,206.35, the strongest level since Oct. 14. The currency has dropped 9 percent this year.

Fed Rate Cut

The Fed’s Open Market Committee, which cut lending rates to the lowest ever, said it will do whatever is necessary to ease the longest recession in a quarter-century. The median forecast in a Bloomberg survey was for a cut to 0.5 percent.

“Lower rates are more favorable to investors in pesos,” said Julian Ramirez, head analyst at Bogota-based brokerage Proyectar Valores SA.

In Chile, the peso advanced 0.6 percent to 639.86 per U.S. dollar, from 643.95 yesterday. It earlier touched 636.62, the highest since Nov. 14. The currency is down 22 percent this year, the second-worst performer in Latin America after the Brazilian real.

The yield for a basket of five-year peso bonds in inflation- linked currency units, known as unidades de fomento, fell 3 basis points to 3.45 percent, according to Bloomberg composite prices.

Argentina, Peru, Venezuela

Argentina’s peso rose 0.7 percent to 3.3995 per dollar from 3.4225 yesterday. The currency has weakened 7 percent this year. The yield on the country’s inflation-linked peso bonds due in December 2033 dropped 31 basis points to 19.78 percent, according to Citigroup Inc.

Peru’s sol gained 0.7 percent to 3.0860 per dollar, from 3.1075 yesterday. The yield on Peru’s 8.6 percent sol-denominated bond due in August 2017 was little changed at 7.80 percent, according to the local unit of Citigroup Inc.

Venezuela’s bolivar weakened 5.1 percent to 4.90 per dollar in the unregulated market from 4.65 yesterday, traders said. Venezuela pegs the currency at an official exchange rate of 2.15 per dollar under restrictions imposed in 2003. People turn to the unregulated market when they can’t get dollars at the official rate.

By Drew Benson and Andrea Jaramillo

Source: bloomberg.com