Japanese Dump Gilts for Lula Debt as Interest Rates Top 10%: Brazil Credit
Japanese investors are pouring more money into Brazilian bonds than any region in the world after Latin America’s biggest economy raised interest rates the most of any nation this year.
Brazilian debt lured a net $7.6 billion from Japanese mutual funds in the first seven months of 2010, more than the U.S., Canada and Australia combined and exceeding the U.K. and Euro region, according to the Investment Trusts Association in Tokyo. In total, Japanese holdings of Brazilian debt rose 53 percent to a record $1.8 trillion yen ($22 billion).
Banco Central do Brasil President Henrique Meirelles boosted benchmark borrowing costs by 200 basis points, or 2 percentage points, to 10.75 percent this year, the largest increase among 56 central banks tracked by Bloomberg. Rates in Brazil are the highest in the world after Lebanon, Pakistan and Venezuela, attracting carry-trade investors, who borrow in a country with low interest rates to buy higher-yielding assets elsewhere.
“The Japanese are probably some of the most aggressive investors because they know that the carry trade is very valuable,” said Luis Fernando Lopes, who helps manage 1.1 billion reais ($643 million) at Patria Investimentos in Sao Paulo. “Rates aren’t going down in the foreseeable future and that’s an interesting play on fixed income.”
Rising Rates
Japanese investors are seeking higher yields as the Bank of Japan holds the benchmark overnight rate at 0.10 percent, a level it first reached in December 2008. The yield on the country’s benchmark 10-year bond was at 1.11 percent today, within 21 basis points of a seven-year low of 0.9 percent reached Aug. 18. Similar-maturity, real-denominated bonds issued by President Luiz Inacio Lula da Silva yield 11.75 percent, dwarfing the 3.05 percent yield on U.K. bonds, known as gilts, and 2.68 percent yield on U.S. Treasuries.
Traders expect Meirelles, 65, will raise Brazil’s key overnight rate by another 125 basis points to about 12 percent by the end of 2011 to cool an economy expanding at its fastest pace in at least 14 years, according to futures contracts. By comparison, economists anticipate the U.S., U.K. and Japan will keep benchmark borrowing costs below 1.5 percent through next year to shore up faltering growth, according to Bloomberg surveys.
‘Search for Yields’
Gross domestic product grew 8.8 percent in Brazil in the second quarter from the year-earlier period, while rising 1.6 percent in the U.S., 1.9 percent in the Euro region and 1.7 percent in the U.K.
Brazil plans to sell $500 million more of its 5.625 percent bonds that mature in 2041 as soon as today, said a person familiar with the transaction.
Brazil may sell the bonds to yield about 145 basis points above U.S. Treasuries, said the person, who declined to be identified because terms aren’t set. HSBC Holdings Plc and Itau Unibanco Holding SA are arranging the sale, said the person.
“The key story continues to be the search for yields,” said David Beker, who heads Latin America strategy at Bank of America Corp. in New York. “Japanese investors are very long- term focused and the yield differential with Brazil only increases over time.”
Brazil is the only country among the six biggest ranked by the Investment Trusts Association where Japanese investment has climbed every year since 2006.
Bolstering Returns
After Brazil, the Japanese invested a net $4.86 billion in Australian debt, $1.2 billion in Canadian bonds and $1.12 billion in U.S. in the seven months through July, according to the trusts association, a 53-year organization that tracks flow of funds data for Japan. They withdrew $850 million from the U.K. and $21 billion from the Euro region of 16 countries.
The real gained less than 0.1 percent to 1.7099 per dollar by 6 p.m. New York time. The currency has advanced 2 percent this year, extending its gain since the end of 2008 to 35 percent, the most in the world against the dollar. The real climbed 24 percent against the yen over that time.
The increases are helping bolster returns on Brazilian bonds in yen terms, adding to demand for the securities, according to Donato Guarino, an analyst at Barclays Plc in New York. A reversal in the rally may curb that demand, he said. The real will fall 5 percent to 1.80 versus the dollar by year-end, the fourth largest decline among emerging-market currencies, according to the median forecast of 18 economists surveyed by Bloomberg.
Economic Expansion
“The carry trade is attractive when you think the currency will strengthen, but if it blows up in your face, the flows will go away,” Guarino said in a telephone interview.
Yields on Brazilian interbank rate futures due in January were at 10.66 percent. The level shows traders expect no more increases in the benchmark lending rate after policy makers raised it 200 basis points since April, pushing the differential between that rate and those the U.S. and the U.K. to the most in at least 16 months.
Brazil’s economy expanded in the first half at the fastest pace since the data series began in 1996, according to a Sept. 3 report by the national statistics agency.
The extra yield investors demand to own Brazilian dollar- bonds instead of U.S. Treasuries narrowed two basis points to 211 today, according to JPMorgan Chase & Co. indexes.
The cost of protecting Brazilian bonds against default for five years was at 120, 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.
Japanese Immigrants
Cultural ties between Japan and Brazil are helping fuel demand for the debt, according to Patria’s Lopes. Brazil has about 1.6 million Japanese or people of the nation’s descent, the biggest community outside of Japan, according to the country’s embassy in Brasilia.
Banco do Brasil SA, Latin America’s biggest bank by assets, has seven branches in Japan and 140,000 account holders, most of whom are Brazilians of Japanese descent, according to Admilson Monteiro Garcia, director of the firm’s international operations. The Japanese first immigrated to Brazil at the beginning of the 19th century to work in coffee plantations, according to the Nippon-Brazilian Studies Center in Sao Paulo.
“The Japanese are comfortable about investing in Brazil because of the immigration, they know the country,” said Patria’s Lopes. “These are not sophisticated investors. They’re just average Japanese trying to manage the household’s funds.”
To contact the reporter on this story: Tal Barak Harif in New York at tbarak@bloomberg.net
Rate this Page