Structured Notes Tied to Brazilian Real Sell Most in 18 Months

U.S. investors bought $23.8 million of notes this month betting on the Brazilian real to strengthen against the dollar, the most in a year and a half.

The currency has gained 3.1 percent this year to 1.9899 per dollar yesterday in New York, the second-biggest increase among the world’s 16 most-traded currencies against the greenback. Banks sold $50.5 million of U.S. notes tied to the real and dollar in September 2011, Bloomberg data show.

Investors expect that Brazil’s central bank will raise interest rates, bolstering the currency, said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman & Co. in New York. The country’s overnight rate has stayed at 7.25 percent since October.

“The markets right now are giving the central bank the benefit of the doubt, saying ‘OK, the targets are hawkish, they’ll hike when the time comes,”’ Thin said in a telephone interview. “If inflation is going up and we don’t see any action by May, I think people will start bailing on Brazil again.”

HSBC Holdings Plc (HSBA) sold $5.95 million of one-year notes tied to the real against the dollar on March 13, the largest offering this year. The securities yield 28.5 percent if the currency strengthens more than 3 percent and pay 5 percent if the value doesn’t fall, with 15 percent of losses protected and all capital at risk, according to a prospectus filed with the U.S. Securities and Exchange Commission. The bank distributed the notes for a 1 percent fee.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

To contact the reporter on this story: Kevin Dugan in New York at kdugan4@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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