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Vigilantes Raise Rates for Meirelles as Growth `Too Fast': Brazil Credit
Brazil’s bond vigilantes are driving up yields on interest-rate futures as the fastest economic expansion in two decades fuels concern inflation will quicken.
The difference between yields on the overnight rate futures contracts due in January 2011 and 2013 has climbed 43 basis points, or 0.43 percentage point, to 96 from a 19-month low of 53 on Aug. 24. The widening gap shows traders are worried that central bank President Henrique Meirelles hasn’t raised interest rates enough to keep consumer prices in check, a failure that could force his successor to boost them further, said Luciano Rostagno, chief strategist at CM Capital Markets in Sao Paulo.
Latin America’s biggest economy expanded 8.8 percent in the second quarter, more than the 8 percent median estimate in a Bloomberg survey, after growing 9 percent in the January-to- March period, a government report showed on Sept. 3. Two days earlier, Meirelles, 65, left the benchmark interest rate unchanged at 10.75 percent at a policy meeting, ending a stretch of three straight increases.
“Just as the central bank stopped raising interest rates, the data show the economy is growing at a strong pace,” Rostagno said in a telephone interview. “The central bank may have to reinitiate the monetary tightening cycle in the future because the battle against inflation wasn’t won.”
Inflation will quicken to 5.1 percent by year-end from a six-month low of 4.6 percent in July, according to a central bank survey of about 100 economists published on Aug. 30. Policy makers said in a statement after the Sept. 1 meeting that the 10.75 overnight percent rate was consistent with their goal of bringing inflation to an annual 4.5 percent pace. They boosted the rate 200 basis points, or 2 percentage points, from a record low 8.75 percent in the previous three meetings.
Meirelles ‘Comfortable’
The central bank is “comfortable” with the second-quarter economic growth, Meirelles said on Sept. 3.
Second-quarter growth was “absolutely in line with predictions,” he told reporters in Brasilia. “We expect, looking ahead, moderate growth in the third and fourth quarters, leading to a level of economic growth around its long-term equilibrium rate.”
Meirelles reiterated the bank’s forecast for growth of 7.3 percent this year, which would be the fastest pace since 1986. He declined to comment on interest-rate futures.
Meirelles is slated to step down by January as Brazilians vote to replace President Luiz Inacio Lula da Silva in October elections. Lula, who appointed Meirelles upon taking office in 2003, is ineligible to run for a third term.
‘Too Flat’
Yields on the contracts due in January 2013 have surged 42 basis points since Aug. 24 to 11.63 percent while yields on the 2011 contract fell one to 10.67. The 96 basis-point gap is the biggest since Aug. 12.
“The curve is steepening because it was too flat before,” said Donato Guarino, an analyst at Barclays Plc in New York. The economy is “growing too fast,” he said.
The differential had narrowed to 53 basis points, the lowest since January 2009, on Aug. 24 on speculation that Meirelles’s three rate increases were enough to quell inflation as evidence mounted that the expansion was slowing at home and abroad. Investor concern about consumer price increases began to re-emerge last week as data from the U.S. and China pointed to a pickup in the global economy that could fuel demand for Brazilian goods.
Commodities Rally
Companies in the U.S. added 67,000 jobs in August, more than the 40,000 median forecast in a Bloomberg survey, while pending sales of existing houses rose 5.2 percent in July, reports showed last week. Manufacturing in China rebounded last month after posting the weakest performance since early 2009 in July.
“The fact that the slowdown abroad isn’t as severe also is helping pressure the long end of the rates curve,” said Rostagno at CM Capital Markets. “Rising commodity prices and external demand next year should create the right environment for inflation.”
Commodity prices jumped 2.2 percent last week, extending their two-week advance to 3.4 percent, according to the UBS Bloomberg CMCI index of 26 raw materials.
The real gained 0.4 percent today to 1.7268 at 5:00 p.m. New York time. The currency has gained 1 percent this year after surging 33 percent in 2009.
The extra yield investors demand to hold Brazilian government dollar bonds instead of U.S. Treasuries narrowed seven basis points on Sept. 3 to 213, according to JPMorgan Chase & Co.
‘Main Disagreement’
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps dropped two basis points to 117 today, 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.
The 10.67 percent yield on the January 2011 contract shows traders expect Meirelles to raise the benchmark rate by no more than 25 basis points in the remaining two policy meetings of the year, according to data compiled by Bloomberg.
“The main disagreement between the central bank and investors is over the risk of domestic demand stoking inflation,” Andre Perfeito, an economist at Sao Paulo-based Gradual Investimentos, said in a telephone interview. “The central bank pushed the problem of dealing with inflation to the next board.”
To contact the reporters on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net
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