MEXICO CITY – Mexico bond yields rose to a 22-month high Monday and the peso firmed after inflation in May accelerated to its fastest pace since late 2004, increasing bets the central bank could raise interest rates.

The government's benchmark 10-year peso bond rose 12 basis points to 8.52 percent, the highest since August 2006, as its price fell 0.756 of a point to bid 94.998.

The peso firmed 0.19 percent to 10.355 per dollar, while the benchmark IPC index closed 0.69 percent lower at 30,933.44 points.

Mexico's central bank on Monday said consumer prices rose a faster-than-expected 4.95 percent in the 12 months through May, driven by higher prices for food like rice and corn tortillas.

“If prices keep rising, the central bank could tighten monetary policy in July,” one bond trader said.

Some economists expect annual inflation could rise past 5 percent in the coming months. Interest rate futures shot up following the report's release.

The Mexican economy is also expected to slow due to the U.S. economic slowdown, which some analysts expect will help cool price increases and take pressure off the central bank. Mexico sends 80 percent of Mexican exports to its northern neighbor.

Higher expectations of a rate hike bolsters the peso because a wider spread between Mexican and U.S. interest rates would make peso-denominated assets more attractive to yield-hungry investors.

Mexico's peso has gained more than 5 percent since the beginning of the year as cuts in U.S. interest rates pushed the yield spread between the two countries' overnight rate to 5.5 percentage points. Mexico has held rates steady since October.

Stock traders said the equities market slipped after news that U.S. investment bank Lehman Brothers forecast a $2.8 billion loss and unveiled a plan to raise $6 billion to strengthen its capital.

“There is a lot of nervousness because of Lehman. There are probably more losses to come at other banks,” one stock trader said.

Shares of Wal-Mart de Mexico lost 3.36 percent to 43.47 pesos.

Shares of Cemex, the world's No. 3 cement maker, fell 2.99 percent to 28.21 pesos while its New York traded stock shed 2.57 percent to $27.30.

Banorte, the largest Mexican bank not controlled by foreigners, gave up 3.12 percent to 48.12 pesos.

(Reporting by Michael O'Boyle, Inaki Maillard and Lizbeth Salazar; Editing by Dan Grebler)