Surprise rate cut causes high stocks and low bond yields

peso, bonds, colombia

The Colombian Central Bank’s surprise interest rate cut on Friday to a historic low of 3%, down from 3.5%, caused local bond yields to drop and the stock index to hit a record high Monday.

The country’s benchmark IGBC stock index rose to 12,697.70 points on Monday.

The bank was able to cut the interest rate from its previous record level of 3.5%, surprising many onlookers, due to the stable and low rate of inflation.

Colombia’s inflation is expected to end the year at around 3%, placing it squarely within the bank’s target of 2-4%

Meanwhile on Monday the price of peso-denominated bonds rose, making bond yields fall to a five-month low

The 11% bonds due July 2020 saw yields drop to 7.98% on Monday, its lowest closing level since December 2009, according to Bloomberg.

The yield could fall to a four-year low of 7.8% within weeks, according to Colombian brokerage Interbolsa SA.

The cut was “a total surprise,” said Daniel Nino, head analyst at Bancolombia SA, “I don’t think anyone saw this coming. Although there was room for more rate cuts, the economy is recovering so one didn’t see the need for lower rates.”