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Lula May Offer Real-Linked Bonds Overseas as Yields Tumble: Brazil Credit
Brazil is considering selling its first real-linked bonds in international markets in three years as yields on the securities fall to the lowest since May relative to local debt.
The government’s international real bonds maturing in 2022 yield 250 basis points, or 2.5 percentage points, less than its domestic real debt maturing in 2021, according to data compiled by Bloomberg. The difference was 184 basis points on July 1. Deputy Treasury Secretary Paulo Valle said yesterday that it’s “very probable” the government will sell foreign bonds denominated in either reais or dollars by year-end.
The yield gap between local and foreign real bonds is widening as international investors seeking alternatives to near-record low rates in the U.S., Japan and Europe pile into Brazil’s real debt issued in overseas markets. Foreigners prefer to buy the international securities because they can trade them more easily and don’t have to pay local taxes, according to Morgan Stanley.
“It’s a fantastic opportunity to issue debt in your own currency in the external market now,” said Silvia Marengo, who manages Latin American debt with Falcon Private Bank in Zurich. “It makes a lot of sense from the government’s perspective.”
The yield on the international real bonds due in 2022 has plunged 127 basis points in the past two months to 9.16 percent. Yields on the 2021 real bonds issued in the local market dropped 57 basis points over that time to 11.65 percent. The gap between the two reached 255 basis points on Aug. 27, the widest since May 7.
U.S., Japan
“In the short term, the gap will increase further simply because there’s a differential between rates in the developed world and the world of emerging markets and Brazil is the most attractive,” Vitali Meschoulam, an emerging-market strategist at Morgan Stanley, said in a telephone interview from New York. “It will widen a bit more, but not much.”
The 9.16 percent yield on Brazil’s international real- linked bonds is 669 basis points more than the 2.57 percent yield on benchmark 10-year U.S. Treasuries. Rates on two-year Treasuries touched a record low of 0.45 percent on Aug. 24 while yields on Japan’s 10-year notes declined to a seven-year low of 0.91 percent the following day after evidence mounted that the global economic expansion is slowing.
Sales of existing houses in the U.S. plunged by a record 27 percent in July as weekly jobless claims in August reached the highest level since November. In Japan, policy makers expanded a bank-loan program by 10 trillion yen ($118.7 billion) in an emergency meeting on Aug. 30 as a strong yen threatens to derail its economic recovery.
Brazil Growth
Latin America’s biggest economy, by contrast, is growing at its fastest pace in 15 years, prompting the central bank to boost the benchmark lending rate to 10.75 percent from a record low 8.75 percent in April. Central bankers left the rate unchanged at a policy meeting yesterday, saying it’s at a level that will bring inflation to the government’s 4.5 percent target. Consumer prices rose 4.6 percent in the 12 months through July.
Brazil’s gross domestic product will expand 7.1 percent this year after growing 9 percent in the first quarter, according to a central bank survey of about 100 economists released on Aug. 30.
The extra yield investors demand to own Brazilian dollar- bonds instead of U.S. Treasuries fell two basis points to 220 at 5:40 p.m. New York time, according to JPMorgan Chase & Co. indexes.
The cost of protecting Brazilian bonds against default for five years narrowed two basis points to 122, 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.
2007 Sale
Yields on the interbank rate futures contract due in January fell two basis points to 10.67 percent today. Contracts maturing in 2012 implied that traders forecast policy makers will resume rate increases next year, bringing the benchmark rate to about 12 percent by the end of 2011, according to data compiled by Bloomberg. The real gained 1.2 percent to 1.7260 per dollar, turning into a positive 1.1 percent return this year.
President Luiz Inacio Lula da Silva’s administration last sold real bonds abroad in June 2007, issuing $393 million of securities due in 2028 to yield 8.63 percent. The bonds yielded 9.05 percent yesterday.
‘Too Early’
“It’s very probable that in the second half we access the international market again,” the Treasury’s Valle said in a telephone interview from Brasilia yesterday. “It’s too early” to say whether the bonds will be denominated in reais or dollars, he said.
Valle echoed comments made by Treasury Secretary Arno Augustin in an Aug. 18 interview in Brasilia. Brazil last sold dollar-denominated bonds abroad on July 27, issuing $750 million of securities due in 2021 to yield 4.55 percent.
The government has 10.5 billion reais of real-linked bonds outstanding in international markets, according to the Treasury. Its domestic debt totaled 1.5 trillion reais at the end of July.
Selling the debt abroad “is cheaper than issuing in the local curve,” said Jerry Brewin, who manages $2 billion of emerging-market assets at Aviva Investors in London. “It also taps into a client base that’s not in competition with its local debt curve. It’s diversifying the source of customers.”
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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