Mexico bonds, stocks up as oil's drop fuels rally

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MEXICO CITY, July 17 (Reuters) - Mexico bonds gained on Thursday and stocks rose as lower oil prices eased fears about rising global inflation, while an earnings report from JP Morgan Chase & Co spurred a global rally in equities.

Expectations of an interest rate hike by Mexico's central bank on Friday helped push the peso to a fresh five-year high as investors bet the spread between U.S. and Mexican interest rates would widen, making peso-denominated assets more attractive to investors.

The benchmark IPC stock index .MXX closed 0.88 percent higher at 28,215.86 points, while the peso <MXN=> MEX01 firmed 0.28 percent at the central bank's final 1:30 p.m. local time (1830 GMT) reference to 10.219 per dollar, mostly on the back of gains made Wednesday afternoon. The currency is trading at its strongest levels since May 2003.

Long-term bond prices rose for the third day in a row. The government's benchmark 10-year peso bond <MX10YT=RR> climbed 0.659 of a point to bid 92.161, pushing its yield down 11 basis points to 8.98 percent.

U.S. stocks rose as oil prices CLc1 fell more than $5, dipping below $130 a barrel for the first time in more than a month, curbing fears that high fuel costs could stoke global inflation as well as crimp economic growth.

Strong quarterly results at JP Morgan (JPM.N: Quote, Profile, Research), the third-largest U.S. bank, helped ease concerns about the U.S. credit crisis.

Traders and analysts said that helped spur demand from investors for higher-yielding emerging market assets.

"The rally in the past couple days in equities and the recovery in risk appetite has been helpful," said Siobhan Morden, a fixed-income analyst covering Latin America at ABN AMRO in New York.