Mexico bond prices rise as rates steady, peso firms

MEXICO CITY, May 16 (Reuters) - Mexican bond prices rose on Friday and the peso held onto early gains after the central bank kept borrowing costs steady and investors pared bets that policy-makers would raise interest rates in the coming months.

Long-term bond prices rose for the second day in a row while the peso MXN= MEX01 was 0.46 percent stronger, near two-year highs, at 10.428 per dollar.

Stocks edged up, with the benchmark IPC index .MXX rising 0.29 percent to 31,634 points.

The central bank held interest rates steady at its monthly policy review on Friday for a seventh straight month as concerns about inflation pressures counterbalanced the risks to local economic growth from a possible U.S. recession.

Bond prices had dropped earlier this week after reports that prices of the corn flour tortilla, a Mexican staple, could rise dramatically, spooking investors.

"The market was expecting a very hawkish statement, and the statement was a little more balanced ... so we are seeing a bit of a rally." said David Franco, an fixed-income and currency strategist at BBVA Bancomer in Mexico City.

The government's benchmark 10-year peso bond MX10YT=RR rose 0.198 of a point in price to 98.124, pushing its yield down 3 basis points to 8.03 percent.

Interest rate futures <0#TII:> showed market players scaled back bets that the central bank would raise rates in the coming months.

Franco said investors had overreacted to news of the possible tortilla price increase. Still, he said it was clear that increasing inflation pressures could force the central bank to raise rates later this year, which would help further strengthen the peso.

Should the central bank eventually raise rates, it would further widen the spread between the U.S. target interest rate and Mexico's key rate, making peso-denominated assets more attractive to investors.

The peso has gained more than 4 percent this year as the U.S. central bank has cut interest rates, while Mexico's central bank kept rates on hold due to persistent inflation.

In stock trading, shares of Cemex (CMXCPO.MX), the biggest cement supplier in the United States, gained 4.04 percent to 32.21 pesos after U.S. housing starts rose by a surprisingly strong 8.2 percent in April and building permit applications turned up for the first time in five months.

Cemex New York traded shares (CX.N) jumped 4.4 percent to $30.87.

Miner Grupo Mexico (GMEXICOB.MX) rode rising prices for the copper in New York to gain 2.59 percent to 81.25 pesos. (Reporting by Michael O'Boyle; Editing by Tom Hals)