Treasury Selling Fewest Bonds Since May After Yields Jump: Brazil Credit
Brazil is selling this month the least amount of local bonds since May as a tax increase on foreign investors and speculation the central bank will raise interest rates next year erode demand for the securities.
The government has sold 19.5 billion reais ($11.3 billion) worth of bonds in November, including 5.1 billion reais in yesterday’s auction, after issuing 38.2 billion reais worth of securities in October. It sold 13.4 billion reais of debt in May, when Europe’s growing debt crisis drove up yields in emerging markets.
Yields on benchmark government bonds due in 2021 surged to a six-month high of 12.77 percent this week after President Luiz Inacio Lula da Silva tripled a tax on foreigners’ debt purchases to 6 percent last month to slow investment and stem a currency rally. The yield has jumped 54 basis points since the first of two increases of the so-called IOF tax on Oct. 4, almost double the 29-basis-point increase in yields on similar-maturity Mexican peso bonds over that time.
“All they’ve managed to do is just make the cost of financing more expensive,” Edwin Gutierrez, who helps manage $6 billion in emerging-market debt at Aberdeen Management Plc in London, including Brazilian local debt. “The market is not happy right now with the course of policy in Brazil and it’s voiced that displeasure in the bond market.”
The government sold bonds maturing in 2021 at an average yield of 12.36 percent and notes due in 2017 at 12.18 percent yesterday. It rejected all bids on securities due in 2015.
Deputy Treasury Secretary Paulo Valle said the government has scaled back its fixed-rate debt sales to avoid “putting pressure on the market.”
“This is temporary,” Valle said in a telephone interview from Brasilia. “These securities were well-quoted before volatility picked up.”
Brazil will have to step sales back up to avoid cutting into its cash stockpile, said Vivienne Taberer, who helps manage $5 billion in emerging-market debt at Investec Asset Management in Cape Town. Investec trimmed its “overweight” position in Brazilian bonds after the tax increase, she said.
“You can’t have your cake and eat it,” Taberer said in a telephone interview. “You can’t say we want flows to come in but not too fast. They could probably hold out for a couple of months but sooner or later they have to come back to the market.”
The government isn’t concerned about its cash position, which equals about six months worth of debt principal payments, said Fernando Garrido, head of the Public Debt Operations Department at the Treasury.
“It makes no sense to think that this drop in long-term, fixed-rate bond sales in November will cause cash shortages in the future,” Garrido said in a phone interview from Brasilia. “The Treasury has no cash problems.”
He said officials may consider selling more real-linked bonds overseas, where yields are lower than in the local market.
The government last month issued 1 billion reais of bonds due in 2028 in its first overseas offering of local currency debt in three years. The bonds yielded 8.85 percent, below yesterday’s auction yield on bonds due in 2021, the longest fixed-rate maturity in the Brazilian market.
Local bonds are also slumping as traders bet Alexandre Tombini will begin raising the benchmark lending rate to curb inflation in his first month as central bank president in January. President-elect Dilma Rousseff nominated Tombini, a central bank director since 2005, on Nov. 24 to replace Henrique Meirelles.
The annual inflation rate climbed to 5.2 percent in October, above the central bank’s 4.5 percent target, as a 27 percent jump in government spending in the first nine months of the year fueled consumer demand. Central bankers have held the benchmark rate at 10.75 percent since July following 200 basis points of increases over a four-month period to cool the fastest expansion since the 1980s in Latin America’s biggest economy.
Yields on overnight rate futures due in January 2012 have soared 44 basis points, or 0.44 percentage point, since Nov. 17 to 12.02 percent, showing traders expect the bank to boost the rate to about 12.75 percent by the end of 2011. Tombini, 46, declined to comment on the outlook for rates at a Nov. 24 press conference in Brasilia.
“At some point in time, the market is saying inflation is going to start impacting the requirement on yields,” Enrique Alvarez, head of Latin America fixed-income research at IDEAglobal in New York, said in a phone interview. “Rates at some point are going to have to be moved higher.”
The cost of protecting the nation’s debt against non- payment for five years with credit-default swaps climbed 3 basis points this week to 112 through yesterday, according to data compiled by CMA. 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 extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries rose 5 basis points this week to 182 today, according to JPMorgan.
The real fell 0.4 percent to 1.7279 per dollar today from 1.7216 yesterday. It has gained 1 percent this year after surging 33 percent in 2009, helping push the country’s 12-month current account deficit to a record $48 billion.
The economy will expand 7.6 percent this year after shrinking 0.2 percent in 2009, according to the median forecast in a central bank survey of economists published Nov. 22.
While Brazil’s gross domestic product is surging, concern is mounting that the global economic expansion is faltering after Ireland this month joined Greece in arranging an aid package to cover its financing needs. Ireland’s long-term debt rating was lowered two steps by Standard & Poor’s on Nov. 23 to AA-, undercutting demand for emerging-market debt.
Brazil’s “economy is overheating right now, to be honest,” Aberdeen’s Gutierrez said. “They need to be tightening policy and they’re not so the market is signaling that disapproval. The global risk aversion environment has also contributed to the problem.”
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