Mexico peso jumps on Fed moves; bonds rally

(Recasts; adds analyst's quote and background)

MEXICO CITY Oct 27 (Reuters) - Mexico's peso firmed on Monday on efforts by the U.S. Federal Reserve to help credit markets, while bond yields plunged, helped by speculation of looser limits to risk exposure for local pension funds.

The peso MXN= MEX01 strengthened 1.58 percent to 13.29 per dollar.

The yield on the government's benchmark 10-year peso bond MX10YT=RR fell 80 basis points to 10.5 percent as its price surged 4.03 points to 83.945.

The benchmark IPC stock index .MXX rose 0.57 percent to 17,037 points, led by gains at top retailer Wal-Mart de Mexico.

The Fed is expected to announce at least a half percentage point rate cut on Wednesday in a bid to calm credit markets and help boost growth amid worries of a recession in the economy of the United States, Mexico's top trading partner.

Also helping strained credit markets was the debut of a Fed program to buy commercial paper, or short-term corporate debt.

"Those types of actions will help the global economy, which will help investors eventually get back to local currencies (like the peso)," said Dustin Reid, director of currency strategy at RBS Capital Markets in Chicago.

The peso has been hammered in recent weeks as investors sold off emerging market assets amid worries of a worldwide recession.

Analysts say investors are beginning to gravitate toward countries that may be better positioned ahead of the expected slowdown, such as Mexico, which has paid down much of its foreign-denominated debt in recent years.

Local bonds jumped on speculation that government regulators would loosen restrictions on local pension funds regarding exposure of portfolios to risk, traders and analysts said.

Current restrictions could force local pension funds to sell off assets due to sharp losses in their portfolios.

The yield on the 10-year bond jumped more than 260 basis points between the beginning of October and the end of last week.

In equities trading, shares of Wal-Mart de Mexico (WALMEXV.MX) gained 3.24 percent to 30.89 pesos.

Offsetting gains, shares of America Movil (AMXL.MX), Latin America's biggest cell phone operator, lost 2.42 percent to 16.15 pesos while its shares in New York (AMX.N) fell 1.23 percent to $24.17. (Reporting by Jason Lange, Michael O'Boyle and Lizbeth Salazar; Editing by Diane Craft)