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Brazil Debt May Be Hurt as Quake to Prompt Repatriation, Guggenheim Says

Debt linked to Brazil’s real may fall as Japanese investors, the largest holders of the bonds, bring funds home to pay for reconstruction following the nation’s earthquake, according to Guggenheim Capital Markets.

Japanese investors hold at least $50 billion worth of real- linked debts issued by the World Bank, European Bank for Reconstruction & Development and Goldman Sachs Group Inc., according to Andrew Brenner, managing director at Guggenheim, a New-York based brokerage for institutional investors.

“Japanese mutual funds bought a huge amount of the papers,” Brenner said in a telephone interview. “Those bonds will be under pressure. Japanese will look at what they’ve got and put more money in their own country for infrastructure.”

Japanese stocks fell the most in more than two years today after the nation’s strongest earthquake killed an estimated 10,000 people, shut down factories and sparked the risk of a meltdown at a nuclear power plant. Economic and Fiscal Policy Minister Kaoru Yosano told reporters that the government may use part of the 1.3 trillion yen ($16 billion) in discretionary funds from the budget for the year through March 31 for quake relief.

Brazil’s Treasury declined to comment on the impact on domestic debt from Japan’s earthquake.

Yields on 9.25 percent real-linked bonds due in September 2012 and issued by the European Bank for Reconstruction & Development fell 5 basis points, or 0.05 percentage point, today to 9.07 percent. The bonds’ return is tied to the performance of the real, and the security is rated AAA by Standard & Poor’s, the highest investment grade.

Real’s Gains

The real has gained 39 percent against the dollar over the past two years and 16 percent versus the yen.

The bonds may decline in the final days of this month, which is the fiscal year end in Japan, Brenner said.

Brazil’s inflation adjusted interest-rates are the second highest in the world after Croatia, according to data compiled by Bloomberg. Brazil is home to about 1.6 million Japanese nationals or people of Japanese descent, the biggest community outside of Japan, according to the country’s embassy in Brasilia.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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