Mexico's peso, bonds gain on downgrade relief

* Peso gains for second day in wake of downgrade

* Bond yields rally to one-month low

* Stocks slip, tracking losses on Wall Street (Recasts, adds comments, share and debt movement)

MEXICO CITY, Nov 24 (Reuters) - Mexico's peso firmed on Tuesday and bonds hit a six-week high, backed by expectations the currency could extend a rally as investors look past a debt downgrade that had been widely priced in.

The peso MXN=MEX01 firmed 0.6 percent to 12.89 per U.S. dollar, on track for its strongest close in a month, even as the IPC stock index .MXX closed down 0.53 percent to 30,961.99, tracking losses on Wall Street.

"Even with the Dow falling and the dollar strengthening, it hasn't been enough against our currency. This shows there is a lot of interest to bet on the peso," said a trader in Mexico City.

Fitch Ratings cut Mexico's sovereign debt rating by one notch on Monday, but the move was widely expected by markets and the currency rallied as Fitch put the country's credit outlook to stable, quelling the threat of a further cut. [ID:nN23261132]

The risk of a downgrade had weighed down the peso this year, causing the currency to lag a global rally in riskier emerging market assets.

"The downgrade was totally priced in. They finally issued it, and the most important was that they put the outlook to stable," said Alonso Madero, who manages 60 billion pesos in fixed-income assets at Actinver in Mexico City.

The peso has gained around 4 percent since Nov. 6, supported by expectations that U.S. interest rates will remain low well into 2010 even as the Mexican economy benefits from a recovery in U.S. demand for local exports.

The yield on the government's benchmark 10-year peso bond MX10YT=RR was bid down 7 basis points to 7.80 percent, its lowest since Oct. 14.

Traders said bonds were also supported by inflation data for early November, which showed Mexico's annual inflation rate fell to its lowest level in more than a year and a half, easing pressure on policy makers to raise interest rates. [ID:nN24301587]

U.S. stocks fell on Tuesday, a day after the Dow hit a 13-month high, following weaker-than-expected data on the economy and home prices. The Conference Board's U.S. consumer confidence index for November, however, beat analysts' expectations.

In Mexican stock trading, shares in cement maker Cemex (CMXCPO.MX: 行情) shed 2.57 percent to 14.40 pesos while copper miner Grupo Mexico (GMEXICOB.MX: 行情) lost 1.57 percent to 30.19 pesos.