Sept. 23 (Bloomberg) -- Brazilian credit-default swaps show investors are betting on more rating increases after the country was lifted above junk by Moody’s Investors Service.

The cost of protecting Brazilian debt against default for five years is 1.22 percentage points, according to data compiled by Bloomberg. That’s less than the 1.26 points it costs to protect debt issued by South Africa, a country rated three levels higher than Brazil at A3. Credit-default swaps on Poland, which Moody’s places four levels higher at A2, trade at 1.17 points.

Brazil’s rating was boosted to Baa3, the lowest investment- grade, by Moody’s yesterday after the country tapped record foreign reserves to stem a currency rout, cut interest rates and increased lending to help turn around a recession sparked by the global financial crisis. Moody’s kept a positive outlook on Brazil, signaling it’s considering more increases.

“The momentum is clearly for more positive ratings actions,” said David Bessey, who manages more than $8 billion of emerging-market debt at Prudential Financial in Newark, New Jersey. “It’s a little surprising when they upgrade something and leave it on positive watch. But given how strong the economy has been there, it’s certainly not crazy.”

‘Resilience’

Moody’s cited Brazil’s “strong economic and financial resilience” during the worldwide slump for the upgrade, which came a year after Standard & Poor’s and Fitch Ratings increased their ratings for Brazil above junk, or speculative grade. An investment-grade rating from all three major ratings companies will help attract more pension fund money to the country’s debt, Finance Minister Guido Mantega told reporters outside of Moody’s office in New York yesterday.

Igor Arsenin, an emerging-market strategist at Credit Suisse Group in New York, said he expected Moody’s might have increased Brazil’s rating two levels.

“It’s quite possible they get upgraded again down the road,” Arsenin said. “Brazil is already trading better than the upgrade would suggest.”

Brazilian central bank President Henrique Meirelles told reporters yesterday in Sao Paulo he expects S&P and Fitch to follow Moody’s and put the country’s rating on positive outlook. Both agencies rate Brazil’s debt BBB-.

Further Improvement

“We are not contemplating any positive or negative rating action on Brazil,” Shelly Shetty, a Fitch analyst, said in a telephone interview from New York. “We have to see Brazil continue to be resilient in this crisis and further improve its external balance sheet.”

Sebastian Briozzo, an S&P analyst, said the company has no plans to change Brazil’s outlook soon. He said the government’s response to the financial crisis was “solid” though expected from a country rated at investment grade.

Win Thin, a senior currency strategist at Brown Brothers Harriman in New York, told clients in a note today that he expects Brazil’s credit rating to be raised another level by rating companies by 2010.

At 1.22 points, it costs $122,000 to protect $10 million of Brazilian debt against default for five years. It cost $434,000 to protect Brazilian debt on March 2, when the seizure of global credit markets had pushed Latin America’s biggest economy into a recession.

Credit-default swaps, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Record Reserves

Brazil’s foreign reserves have climbed to a record $224 billion as prices for its commodity exports rebounded and investors poured money into the stock and bond markets, encouraged by President Luiz Inacio Lula da Silva’s stimulus measures. Reserves were $206 billion a year ago and $74 billion three years ago.

The country is unlikely to receive any more rating increases soon because presidential elections late next year to choose Lula’s successor will spark concern that the government may ramp up spending, said Guillermo Mondino, the head of Latin American Research at Barclays Plc in New York.

“We’d like to see Brazil continue to reduce its debt, continue a process of fiscal consolidation,” Mondino said.

Top Currency

The yield to the 2015 call date on Brazil’s 11 percent bond due in 2040, one of the most widely traded emerging-market securities, was little changed today at 4.36 percent, according to JPMorgan Chase & Co. The bond’s price fell 0.4 cent on the dollar to 133.85 cents after gaining 0.5 cent yesterday. The bonds traded at 127.67 cents a year ago.

The real was little changed today, falling 0.2 percent to 1.7960 per dollar, after jumping yesterday as much as 1.9 percent, the most in a month, following the upgrade. The real has soared 29 percent this year, rebounding from a 23 percent tumble in 2008. Its rally is the biggest among the 16 most- traded currencies against the dollar.

Brazil’s economy grew 1.9 percent in the April-to-June period from the previous three months, signaling the country is pulling out of recession faster than other developing nations. Gross domestic product will post a full-year contraction of 0.4 percent in 2009, compared with a 7 percent decline in Mexico, the region’s second-biggest economy, according to the median forecasts in Bloomberg surveys.

“The economy in Brazil is doing great,” Bessey said. “They really weathered the storm over the last year or so very well.”

To contact the reporter on this story: Lester Pimentel in New York as lpimentel1@bloomberg.netCatarina Saraiva in New York at asaraiva5@bloomberg.net.

Last Updated: September 23, 2009 16:27 EDT