Investors are snapping up Brazilian fixed-rate bonds at the fastest pace in 15 months relative to inflation-linked notes just as the accelerating economy shakes optimism that price increases will keep slowing.
The yield difference on securities due in 2012 shrank 45 basis points, or 0.45 percentage point, to 535 from a 17-month high on May 4, according to data compiled by Bloomberg. The last time the so-called breakeven rate, which reflects investors’ expectations for consumer prices over the period, fell faster was in March 2009, when the inflation rate began an eight-month slide.
Marco Freire, who manages $2.5 billion as chief investment officer of fixed-income at Franklin Templeton Investimentos Brasil in Sao Paulo, said the yield gap will start to widen as seasonal effects on inflation dissipate next month. Prices will climb as Brazil’s economy grows 7.2 percent in 2010, the fastest pace in 15 years, a central bank survey of economists published July 5 showed.
“The decline in inflation is temporary,” Freire said. “The economy is still strong. There will be good opportunities to buy some inflation protection.”
Yields on Brazil’s 10 percent fixed-rate bonds due 2012 fell 54 basis points to 11.97 percent in the past two months. The inflation-linked bond yield declined 18 basis points to 6.59 percent.
The International Monetary Fund raised its forecast for Brazil’s economic growth this year to 7.1 percent, a 5.5 percent prediction in April, the Washington-based organization said in revisions yesterday to its World Economic Outlook. The increase is the bigger than any other country, according to the report.
Brazil’s central bank has boosted the benchmark rate to 10.25 percent from a record low of 8.75 percent in March as the economic growth threatens to quicken inflation.
Ures Folchini, the executive vice-president of fixed-income in Sao Paulo at the Brazilian unit of WestLB AG, said inflation will continue to slow as the central bank raises borrowing costs.
“It’s a bad time to buy inflation-linked bonds,” said Folchini. “Inflation is under control. There’s no overheating.”
Brazil’s annual inflation as measured by the IPCA index slowed to 4.84 percent in June, from 5.22 percent the previous month, the national statistics agency said yesterday. Food prices, which account for more than 30 percent of the index, fell 0.9 percent from May, the biggest monthly decline in over a decade.
“These readings mainly reflect seasonal factors and some disinflation dynamics in the food sector,” said Roberto Melzi, a strategist at Barclays Plc in New York. “They’re not related to monetary policy. The economy is expanding very rapidly, and that’s consistent with the view that after seasonality, inflation will pick up.”
Barclays recommends clients buy inflation-linked bonds maturing in May 2011 as the yield difference between the notes and similar-maturity interest-rate futures contracts widens to 6 percentage points from 5.3 percentage points.
Brazil’s inflation rate, which has stayed above the central bank’s target of 4.5 percent every month this year, will climb to 5.6 percent by year-end, the central bank survey showed.
Default Expense Falls
The extra yield investors demand to own Brazilian dollar- bonds instead of U.S. Treasuries narrowed five basis points to 231, according to JPMorgan Chase & Co. indexes. The yield gap touched a nine-month high of 251 on June 8.
The cost of protecting Brazilian bonds against default for five years fell three basis points yesterday to 136, according to CMA DataVision prices. 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 fell 0.4 percent to 1.7738 per dollar.
The yield on the interbank rate futures contract due in January rose three basis points to 11.32 percent, suggesting the central bank will raise its benchmark interest rate to about 11.9 percent by year-end.
Brazilian bonds linked to the IPCA index gained 6.9 percent this year, beating the 6.1 percent return for Brazil’s fixed- rate securities, according to data compiled by the Rio de Janeiro-based National Association of Financial Market Institutions. The securities also outperformed the 3.3 percent return on inflation-protected bonds in the U.S. and 0.3 percent advance in Europe, according to JPMorgan indexes.
Rogerio Oliveira, a strategist at Morgan Stanley in New York, said he favors Brazil’s inflation-linked bonds as “heavy supply” of fixed-rate debt will push yields higher. The government plans to issue as much as 640 billion reais ($362 billion) of fixed-rate bonds this year, compared with 484 billion reais of inflation-linked bonds.
“Brazil’s economic performance seems to have solid foundations,” Oliveira said in a note on June 22. “We expect the Brazilian National Treasury to substantially concentrate issuance on nominal bonds and be lighter on linkers. All these factors provide an environment that favors linkers over fixed- rate debt.”