Brazil Real Surges, Future Yields Decline as Interest-Rate Cut Bets Grow

Yields on most Brazilian interest- rate futures contracts maturing in November or later tumbled on speculation the central bank will cut interest rates to shore up growth as the global economy slows.

Yields on the rates contract due in January 2013 plunged 14 basis points, or 0.14 percentage point, to 11.83 percent, reversing a four basis-point increase earlier. Yields on the contract due in January 2012 fell three basis points to 12.23 percent. The real surged 2.3 percent, the biggest jump since June 2010, to 1.5890 per dollar, from 1.6263 yesterday.

Brazilian traders stepped up rate-cut bets after the Federal Reserve pledged for the first time to keep the benchmark U.S. rate at a record low at least through mid-2013 to revive the flagging recovery after a worldwide stock rout. The Bovespa stock index jumped 5.1 percent following yesterday’s 8.1 percent plunge. Investors are betting Banco Central do Brasil may be more aggressive in lowering rates than it was as the beginning of the financial crisis in 2008, said Solange Srour, chief economist at BNY Mellon ARX Investimentos in Rio de Janeiro.

“The central bank received a lot of criticism that it cut rates too late” during the 2008 crisis, Srour said in a telephone interview. “The market has begun to price in the fact that this time they may be more aggressive.”

Traders are boosting bets of a decrease in borrowing costs after a U.S. credit-rating downgrade intensified concern that an economic slowdown in Brazil’s second-biggest trading partner will worsen.

Economists covering the Brazilian economy cut their 2012 inflation forecast for the first time since June, on bets that slower growth will help curb consumer price rises. a central bank report showed yesterday.

Consumer prices will rise 5.27 percent next year, according to the median forecast in an Aug. 5 central bank survey of about 100 economists published yesterday. The figure was down from a forecast of 5.30 percent the previous week.

The prospect of an interest-rate cut spurred the Bovespa to rally the most since October 2009, rebounding from a 27-month low to close at 51,150.90 at the end of Sao Paulo trading at 4:15 p.m. New York time.

The real advanced as foreign investors poured money back into the Brazilian stock market, said Francisco Carvalho, currency director at Liquidez DTVM.

“The market is very volatile,” Carvalho said in a telephone interview from Sao Paulo. “This shows that the market is still a bit lost about what the impact of this crisis will be.”

To contact the reporters on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net

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

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