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Lula Fixed-Rate Debt Beats CPI-Linked Bonds Most Since 2005: Brazil Credit
Brazilian fixed-rate bonds are beating inflation-linked debt for a fifth straight month, the longest streak since 2005, as a slowing economic expansion keeps consumer prices in check.
Fixed-rate bonds have gained 1.25 percent in August, compared with a 0.87 percent return for inflation-indexed notes, according to data compiled by the Brazilian Association of Financial and Capital Market Institutions in Sao Paulo. The last time the benchmark notes outperformed for five straight months was in 2005, when the annual inflation rate fell from a 16-month high of 8.1 percent.
Demand for inflation protection is waning after consumer prices posted the smallest annual increase in six months in July. The central bank will keep its benchmark borrowing costs at 10.75 percent at the conclusion of a two-day policy meeting tomorrow as growth in Latin America’s biggest economy slows from its fastest pace in 15 years, according to the median forecast of 44 analysts surveyed by Bloomberg.
“You had a reduction of inflation expectations in the last few months,” Tulio Vera, chief strategist at New York-based Bladex Asset Management and former head of emerging-markets research at Merrill Lynch & Co., said in a telephone interview. “The economy has stabilized and the tightening cycle may be over for the time being.”
Yields on Brazil’s 10 percent bonds due in January 2013 fell 37 basis points, or 0.37 percentage point, in August, the biggest monthly decline since May 2009, to 11.68 percent. Yields on the country’s 6 percent inflation-linked bonds maturing in May 2013 dropped 19 basis points this month to 6.12 percent.
Narrowing Gap
The difference between the two securities, which reflects investors’ expectations of the average inflation rate over the period, narrowed to 549 basis points from a 17-month high of 613 on May 4.
Brazilian annual inflation slowed to 4.6 percent in July from a one-year high of 5.3 percent in April. President Luiz Inacio Lula da Silva’s government targets annual inflation of 4.5 percent.
Industrial production rose 0.4 percent in July from the previous month, compared with a 1 percent decline in June, the national statistics agency said today. The July figure was lower than the median estimate of a 0.8 percent increase among 36 analysts surveyed by Bloomberg.
Gross domestic product may have expanded between 0.5 percent and 1 percent in the April-to-June period from the first quarter, the weakest pace since output contracted in the first quarter of 2009, Finance Minister Guido Mantega said yesterday in Sao Paulo.
‘Bullish Trend’
Central bank President Henrique Meirelles has boosted the benchmark interbank rate by 200 basis points from a record low 8.75 percent in April after the economy expanded at a 9 percent annual rate in the first quarter. Meirelles, who turns 65 today, said in an Aug. 16 speech that inflation expectations for next year are “around” the central bank’s target, prompting yields on fixed-rate bonds due in 2013 to plunge 20 basis points, the biggest decline since May 2009.
“Policy members are not going to hike rates and that would reinforce the bullish trend for the fixed-rate” securities, said Nick Chamie, global head of emerging-markets research at RBC Capital Markets in Toronto, a unit of Canada’s biggest bank.
Inflation-linked bonds will start outperforming because economic growth will quicken again, said David Beker, who heads Latin America strategy at Bank of America Corp. in New York.
‘Huge Rally’
“We saw a huge rally in the fixed-rate debt because people decided to revise their interest rate forecasts towards lower levels,” Beker said in a telephone interview. “Moving forward I don’t think that would be the case. The markets will end up re-pricing the inflation risk.”
Economists raised their inflation forecast for the next 12 months to 4.99 percent from a week-earlier estimate of 4.97 percent, a central bank survey published yesterday showed. The economy will expand 7.1 percent this year after shrinking 0.2 percent in 2009, according to the survey.
Yields on the interbank rate futures contract due in January fell one basis point to 10.69 percent, a level that indicates traders expect the central bank to raise the benchmark rate no more than 25 basis points by year-end. Contracts maturing in 2012 implied that traders forecast policy makers will resume rate increases next year, bringing the benchmark rate to about 11.75 percent by the end of 2011, according to data compiled by Bloomberg.
‘Favorable’ Rate
The extra yield investors demand to own Brazilian dollar- bonds instead of U.S. Treasuries rose one basis point to 230 today, the highest level since July 8, according to JPMorgan Chase & Co. indexes.
The cost of protecting Brazilian bonds against default for five years held at a one-month high of 131, 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 gained 0.2 percent to 1.7559 per dollar today, paring its decline this year to 0.7 percent. The real gained 33 percent in 2009, the most among the world’s major currencies.
Mantega said yesterday that foreign-based companies operating in Brazil should consider sending some profits home as the exchange rate is unlikely to remain as “favorable” as it is now. The real will drop to 1.8 percent by the end of this year and 1.85 by December 2011, according to the median forecast of analysts surveyed by Bloomberg.
U.S., Europe
Brazil may “slowly” reduce its inflation target after 2012, Nelson Barbosa, the economic policy secretary at the Finance Ministry, told reporters yesterday in Sao Paulo.
The underperformance of Brazilian notes tied to inflation resembles that of similar securities in the U.S. and Europe, where slower economic growth revived concern that developed nations may be headed for deflation. Treasury Inflation Protection Securities, known as TIPS, gained 6.08 percent this year, compared with a return of 8.45 percent in U.S. fixed-rate bonds, according to Merrill Lynch indexes.
Brazil’s fixed-rate bonds have returned 8.7 percent this year, following a 12.5 percent gain in 2009. Inflation-linked notes with a maturity less than five years returned 8.3 percent after gaining 15 percent last year.
“We are seeing a global push lower in rates as the recovery has stalled, more so in the developed world,” said Bladex’s Vera. “The debate about inflation and growth dynamics will be on the table in Brazil for a while.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Tal Barak Harif in New York at tbarak@bloomberg.net
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