By Andrea Jaramillo Sept. 7 (Bloomberg) -- Mexico’s peso bonds rose, pushing yields to their lowest in three months, on speculation the government will find additional ways to cut spending as it seeks to rein in a swelling budget deficit. The government is scheduled to send its budget proposal tomorrow to Congress, where legislators are expected to discuss a combination of spending cuts, new taxes and increased borrowing to make up for a decline in tax and oil revenue. Mexican President Felipe Calderon said last week the country will make “drastic changes” to public finances, without giving details of the plan. “Everyone knows an increase in taxes will be difficult to pass so there’s already talk of other alternatives such as reducing the size of the government by closing down some entities,” said Luis Flores, senior economist at IXE Grupo Financiero SA in Mexico City. “Since people have been pricing in a negative outcome for plans to raise taxes, any advance in cutting spending will push gains in the market.” Yields on Mexico’s 10 percent bond due December 2024 declined 5 basis points, or 0.05 percentage point, to 8.25 percent at 11:03 a.m. New York time, according to Banco Santander SA. That’s the lowest yield since June 4. The price rose 0.45 centavo to 115.11 centavos per peso. The government forecasts its budget deficit will widen to 3 percent of gross domestic product this year from 2.1 percent in 2008. The peso was little changed at 13.3680 per U.S. dollar from 13.3631 on Sept. 4. To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net;

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