Interest-Rate Futures Decline After Euro Fund Rating Cut; Real Unchanged

Yields on most Brazilian interest- rate futures contracts declined after Standard & Poor’s cut Europe’s stability fund, adding to speculation the region’s debt crisis will weaken global growth and damp inflation.

Yields on the futures contract due in January 2015 fell three basis points, or 0.03 percentage point, to 10.83 percent. The contract due in January 2013 rose one basis point to 10.02 percent, after earlier rising as much as six basis points. The real was little changed at 1.7861 per U.S. dollar, from 1.7863 on Jan. 13.

Traders stepped up bets on deeper interest-rate cuts after the European Financial Stability Facility lost its top credit rating, following S&P’s downgrades of France and Austria last week. With a holiday in the U.S., traders are positioning themselves on how the market will react to the downgrade when U.S. markets reopen tomorrow, said Arthur Totti, a portfolio manager with Grau Gestao de Ativos in Sao Paulo.

“The DI gave back all of its earlier gains mostly because of the downgrade,” Totti said in telephone interview.

The rating was lowered to AA+ from AAA, S&P said in a statement today. It had said on Dec. 6 that the loss of an AAA rating by any one of the EFSF’s guarantor nations may lead to the facility being downgraded.

Futures yields rose earlier after the economy grew more than forecast in November, damping speculation the central bank may accelerate the pace of interest-rate cuts.

Economic Activity

Seasonally adjusted economic activity, a proxy for gross domestic product, rose 1.15 percent in November from October, the fastest pace in 19 months, the central bank said in a report published on its website today. The median forecast of 21 analysts surveyed by Bloomberg was for a 0.9 percent gain. The increase follows three straight months of falling economic activity, its longest contraction since the one that followed the bankruptcy of Lehman Brothers Holdings Inc. in 2008.

Policy makers have cut the benchmark lending rate 150 basis points since August to 11 percent to shore up the economy. Traders are wagering central bank President Alexandre Tombini will reduce the Selic rate by 50 basis points this week during its two-day policy meeting and to as low as 10 percent by May, according to interest-rate futures yields.

Consumer prices, as measured by the IPC-S report, rose 0.97 percent in the period through Jan. 15, according to the Rio de Janeiro-based Getulio Vargas Foundation. That compares with a median estimate of 0.96 percent among 13 economists surveyed by Bloomberg.

Surplus Target

President Dilma Rousseff may abandon the full fiscal surplus target of 139.8 billion reais ($78 billion) this year to increase public investment and boost economic growth, Valor Economico reported, without saying where it got the information.

Deputy Finance Minister Nelson Barbosa supports more investments, while Finance Minister Guido Mantega opposes the suggestion and recommends that Brazil complies with its full fiscal surplus goal, the Sao Paulo-based newspaper said.

Reducing the fiscal surplus could result in an end to the central bank’s interest-rate cuts, which would be undesirable, Valor said.

U.S. markets are closed today for the Martin Luther King Jr. holiday.

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; 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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