Brazil Real Bonds' `Massive Premium' Lure Aviva, KBC as Dollar Yields Fall
Brazil Deputy Treasury Secretary Paulo Valle
Daniel Acker/Bloomberg
The increase in foreign investor purchases “is a trend stemming from Brazil’s economic stability,” said deputy Treasury Secretary Paulo Valle, seen here.
The increase in foreign investor purchases “is a trend stemming from Brazil’s economic stability,” said deputy Treasury Secretary Paulo Valle, seen here. Photographer: Daniel Acker/Bloomberg
A three-month rally that drove yields on Brazil’s dollar bonds to a record low is prompting investors led by KBC Asset Management SA and Aviva Investors to pare holdings and buy the country’s real-denominated notes.
The average yield on Brazil’s dollar bonds fell to an all- time low of 5.27 percent yesterday, or 6.53 percentage points less than the country’s local-currency securities, according to JPMorgan Chase & Co. indexes.
Kieran Curtis, who helps oversee $2 billion at Aviva in London, said he shifted to local bonds after cutting holdings of dollar notes last month to an “underweight” position because the yields fail to compensate investors for the risk of a slowdown in the global economic recovery. Foreign investors boosted their purchases of real bonds to a record this year to tap into Brazil’s fastest economic expansion in two decades and rising interest rates, according to the Treasury.
“We are underweight external debt in Brazil because there’s a lot of value in the local market, where there’s massive risk premium,” Curtis said.
Yields on Brazilian dollar bonds tumbled 67 basis points, or 0.67 percentage point, this year after posting the biggest three-month rally since September, according to JPMorgan’s EMBI+ index. The country’s reais-denominated notes yield 11.70 percent, down 44 basis points this year, JPMorgan’s GBI-EM Global Diversified index shows. The yield gap reached 6.6 percentage points in May, the biggest since December 2008.
July Outperformance
Brazil’s local-currency bonds gained 4.4 percent last month, the most in five months and outpacing the 3.4 percent advance in dollar debt, as the central bank raised the benchmark Selic rate by a less-than-expected 50 basis points to 10.75 percent on July 21. It was the first time real securities outperformed dollar bonds since April.
Foreign investors held in June a record 9.35 percent of Brazil’s domestic public debt, Jose Franco Morais, deputy head of public debt operations at the Treasury, said July 22. In January 2005, they owned 0.69 percent of the debt, according to figures provided by the Treasury.
The increase in foreign investor purchases “is a trend stemming from Brazil’s economic stability,” said Deputy Treasury Secretary Paulo Valle in a telephone interview from Brasilia yesterday.
“The real is a stable currency and the country is expanding,” he said. “There is a trend, after the global crisis, of diversification of currencies.”
Latin America’s largest economy will grow 7.2 percent this year, according to a central bank survey this week. The U.S. economy is forecast to grow 3.1 percent in 2010, according to a Bloomberg survey.
Yield Spread
The real was little changed at 1.7518 per dollar today at 5:12 p.m. New York time, leaving it down 0.4 percent this year. It gained 33 percent in 2009, the biggest appreciation among the world’s major currencies.
The extra yield investors demand to hold Brazilian government dollar bonds instead of U.S. securities fell 39 basis points, or 0.39 percentage point, in the past month, the biggest decline since April 2009, according to JPMorgan’s EMBI+ index. The gap widened four basis points today to 204.
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps was little changed at 115, 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.
Sustainable Level
Yields on the interest-rate futures contract due in January fell 3 basis points at 10.8 percent, indicating traders expected the central bank to raise its benchmark to 11 percent by year- end from 10.75 percent. The central bank has lifted the borrowing costs 200 basis points this year.
Policy makers said in the minutes of their last meeting that economic growth may have slowed to sustainable levels since the start of the year, fueling speculation they may stop raising borrowing costs soon.
Jean-Dominique Butikofer, who helps manage about $500 million of Latin American debt at Union Bancaire Privee in Zurich, reduced his holdings of real bonds twice since April as the central bank’s dollars purchases stemmed the real’s gain, curbing returns on local debt.
The central bank tripled daily dollar purchases in the spot market this year, buying $15.6 billion to stem the real’s rally, according to the bank’s website.
Currency Swaps
Speculation policy makers may step up currency interventions mounted after central bank officials called foreign exchange traders on July 23 to gauge their demand for reverse currency swaps, according to BNP Paribas, Nomura Securities International Inc. and CM Capital Markets. The swaps allow policy makers to sell the real for dollars in the futures market.
“The central bank doesn’t want the currency to appreciate,” Butikofer said. “If global growth turns out to be a milder than expected, you have a few commodity currencies that will suffer the most. The real is one of the currencies.”
Brazil sold $750 million of bonds due in 2021 in overseas market on July 27 to yield 4.547 percent. The yield fell to 4.31 percent today, according to JPMorgan Chase data, compared with a 12.1 percent yield on real-denominated bonds with a similar maturity.
“It’s expensive,” said Lazlo Belgrado, who helps manage about 25 billion euros of fixed income assets at KBC Asset Management. “There’s very little potential left. In local currency debt, it’s another story. Brazil is offering such high yields that are very difficult to find in the developed world.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net
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