Brazil Local Bonds Lure Foreign Pension, Wealth Funds With Rates Above 10%

International pension and sovereign wealth funds are increasing demand for local Brazilian government bonds, lured by interest rates above 10 percent and a stable economy, Deputy Treasury Secretary Paulo Valle said.

Foreign investors hold 8.7 percent of Brazil’s domestic debt, compared with almost zero in 2006, Valle said in an interview at Bloomberg headquarters in New York. Investors from European and Asian nations such as South Korea and China are showing more interest, he said.

Demand has grown since Brazil earned an investment grade rating from Moody’s Investors Service in September, putting it one level above junk at all three major ratings companies, and the economy expanded an annual 9 percent in the first quarter. Brazil’s fixed-rate notes due in 2021 yield 12.4 percent versus 7.95 percent on similar-maturity bonds from Colombia, also rated BBB- by Standard & Poor’s. Hungarian debt rated BBB- due in 2023 yield 7.53 percent, according to data compiled by Bloomberg.

“Before the investment grade, we had more emerging-market investors,” Valle said. “Now we have much more diversification in terms of the type of investors -- the long-term investors -- and in terms of the origin: we have more participation of Asian and European investors, sovereign funds.”

Vale said the government doesn’t have a target on how much of its debt should be held by international investors.

Debt Structure

“Our idea is not to increase too much the participation of the foreign investors, but they have a very important role in the structure of the debt,” he said. “With the participation of foreign investors, we’ve developed this yield curve and we have more liquidity. And now it is helping stimulate the domestic investors to extend the maturities of their debts.”

In 2002, 80 percent of Brazil’s bonds were floating-rate notes or denominated in foreign currency. Now more than 60 percent of the debt is in fixed-rate bonds and inflation-linked notes, Valle said. Floating-rate notes account for 33 percent of the debt while foreign-currency securities make up 6 percent, he said. The government plans to keep reducing the amount of floating-rate debt.

Local investors’ preference for shorter maturities and their concerns that inflation will accelerate have prompted the government to sell longer-dated bonds at higher yields than other countries, said Pablo Cisilino, who manages $12.5 billion in emerging-market debt at Stone Harbor Investment Partners in New York.

The central bank raised the benchmark overnight Selic rate for a second straight meeting in June, lifting it by 0.75 percentage point to 10.25 percent to help stem inflation after the economy expanded at its fastest pace in 15 years.

“You can’t find any country that has as high real rates as Brazil,” Cisilino said. “Brazil really stands out.”

To contact the reporter on this story: Fabiola Moura in New York at fdemoura@bloomberg.net

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