Pimco Says Brazil Local Debt Among Most Attractive

Buildings line Copacabana beach
Buildings line Copacabana beach near Sugarloaf Mountain in Rio de Janeiro, on Sept. 25, 2009. Photographer: Douglas Engle/Bloomberg

Brazil’s local bonds are one of the top picks at Pacific Investment Management Co., manager of the world’s largest bond fund, as the country’s economic growth and higher interest rates offer “attractive” returns.

“When we look around and we see places that have a combination of healthy balance sheet, favorable valuations and orthodox policies, one place that stands out is the local markets in Brazil,” Michael Gomez, Pimco’s co-head of emerging markets, said in an interview with Bloomberg Television from Munich. Brazil’s bonds offer “a very attractive degree of compensation for a very well-run economy,” he said.

Brazil’s real-denominated bonds returned 7.8 percent in local currency terms in the past 12 months, beating the average return of 4.4 percent for emerging markets, according to JPMorgan Chase & Co.’s ELMI+ indexes. Yields for the real- denominated bonds maturing in January 2017 rose to a two-month high of 12.88 percent yesterday, or 9.6 percentage points higher than same-maturity U.S. Treasury yield.

Latin America’s biggest economy is set to grow 5.6 percent this year, after contracting 0.2 percent in 2009, according to a central bank survey of economists published on April 12. That compares with the 2.1 percent growth rate in advanced nations forecast by the International Monetary Fund in January.

European Debt

Pimco increased its holding of emerging-market debt in March to the most since 2008 while cutting its non-dollar bonds of developed nations. Emerging debt at Pimco’s $220 billion Total Return Fund rose to 6 percent of assets from 5 percent in February, and non-dollar bonds of developed nations declined to 18 percent, the first reduction since October, the Newport Beach, California-based company said this week on its Web site.

The shift came as European nations, including Greece, Spain and Portugal, struggle to finance their debt. The yield on 10-year Greek government bonds rose 0.22 percentage point to 7.35 percent today, near the highest level since 1998, even after the European Union and the IMF pledged on April 11 to fund a $61 billion rescue package.

“In developed countries, you have an outlook for relatively slower growth,” said Gomez. “That slower growth comes in part with and in part because of sovereign balance sheets which are heavily debt laden. This is a period of multi-year adjustment.”

Budget Deficit

Greece needs to raise 11.6 billion euros by the end of May to cover maturing debt, with another 20 billion euros required by year-end to pay interest and finance this year’s deficit. Greek Prime Minister George Papandreou has implemented tax increases, trimmed spending and cut wages to try to lower the budget shortfall from 12.9 percent of gross domestic product last year, the largest deficit in the euro’s history, to 8.7 percent this year.

“The debt dynamic math still doesn’t look favorable for them,” said Gomez. “The first thing we need to see from them is a set of assumptions around their package which we think are more realistic.”

Gomez said in an interview in February that Pimco has been a “consistent” buyer of Brazilian bonds in part as a bet the winner of October’s election will match the success of President Luiz Inacio Lula da Silva in orchestrating economic growth while containing the budget deficit. Pimco’s Emerging Markets Bond Fund gained 33 percent in 2003, the best year since its inception in 1997, after Pimco loaded up on Brazilian debt ahead of the presidential vote the previous year.

Compared with Europe, developing countries are playing a more important role driving global growth, said Gomez, adding that China will allow its currency to rise “sooner rather than later” to curb inflation.

The yuan will rise 5 percent in a year, according to Gomez. Twelve-month non-deliverable yuan forwards imply the currency will gain about 3.1 percent in a year.

“They need to tighten policies,” said Gomez. “They recognize that and they are doing that. The next move perhaps is something related to the exchange rate.”

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