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Brazil Canceling Auctions on Europe Crisis Delays Longest Benchmark Bond

Brazil has canceled the sale of its longest fixed-rate local bonds three times in the past month after Europe’s debt crisis eroded demand for less-traded assets.

The government received no bids it found acceptable for the 150 million reais ($81 million) of 10 percent notes due in 2021 offered yesterday. There’s 6 billion reais of the securities outstanding, less than 20 percent of the 34 billion-real average for the country’s six other fixed-rate notes, according to data compiled by Bloomberg.

Brazil’s decision to drop three of the past five auctions is slowing its push to make the maturity a benchmark bond in the local market, said Diego Donadio, a senior analyst at Banco BNP Paribas in Sao Paulo. The government began selling the bonds in February, replacing notes due in 2017 in the auction schedule.

“The goal is to create a benchmark,” Donadio said in a telephone interview. “The speed is another issue. It can take months, years.”

While yields on the so-called NTN-Fs have fallen to 12.54 percent after rising to a two-month high of 13.20 percent on May 7, bids were “too disperse” in the auction, Fernando Garrido, the Treasury’s debt operations coordinator, said in an e-mail yesterday. Investors are avoiding little-traded securities in developing countries after Greece, Spain and Portugal had their credit ratings cut last month, according to David Spegel, head of emerging-market strategy at ING Groep NV.

More Sales

“Investors are playing it very safe,” Spegel said in a telephone interview from New York. “In Brazil, the long-dated NTN-Fs aren’t as liquid as the shorter ones.”

The auctions are the only ones that the Treasury has canceled in the past month. The government issued 360 million reais of fixed-rate bonds due in 2014 to yield 12.34 percent yesterday. The Treasury said May 28 it plans to increase local issuance to as much as 45 billion reais in June after 12.5 billion reais last month, the smallest amount since December 2008.

Demand for the longest-maturity U.S. debt has picked up while that for Brazil’s slumped. At the last auction of 30-year Treasuries on May 13, investors bid for 2.6 times the amount of securities sold, compared with the average of 2.36 times since February 2006, when sales of the bonds resumed after a five-year hiatus, according to data compiled by Bloomberg.

Real Weakens

The extra yield investors demand to own Brazilian government dollar bonds instead of Treasuries fell 5 basis points to 230 basis points, or 2.30 percentage points, by 5:30 p.m. in New York. The gap has swelled by 63 since touching a 2 1/2-year low of 167 on April 15 on concern the global economic recovery will slow as Europe’s most-indebted countries struggle to finance their budget deficits.

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps fell two basis points today to 135, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real rose 1.7 percent to 1.8176 per dollar today, paring its loss this year to 4 percent. The yield on Brazil’s interest-rate futures contract due in January rose two basis points to 10.98 percent.

Yield Gap Widens

Yields on the 2021 bonds rose one basis point today, according to data compiled by Bloomberg. The rate dropped to a record low 12.49 percent on April 29. Since then, the yield gap between the 2017 and 2021 notes almost tripled to 10 basis points.

There’s 40 billion reais of 2017 bonds and 80 billion reais of 2012 notes outstanding, making them the two biggest fixed- rate securities in the local market.

Foreign investors have disappeared from debt auctions, adding to the Treasury’s struggles, said Paribas’s Donadio and Tony Volpon, Latin America strategist at Nomura Holdings Inc. in New York. International money managers have backed off amid concern Europe’s debt crisis will spread, said Volpon.

Deputy Treasury Secretary Paulo Valle said “volatility” in global markets has created a yield premium that Brazil “won’t sanction.” The government doesn’t release average yields bid at failed auctions.

“The market understands and even supports this refusal by the Treasury,” Valle said in a telephone interview from London. “The increase in volatility in the last two weeks is temporary.”

To contact the reporters on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net; Tal Barak Harif in New York at tbarak@bloomberg.net

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