Brazil Bonds Lose ‘Juice’ as Stocks Lure More Funds

Brazilian bonds face the lowest demand since January relative to stocks as dollar debt yields lag behind returns on corporate profits for the first time in more than a year.

“There’s not a lot of juice there, so investors are looking for opportunities in other markets,” said David Spegel, the New York-based head of emerging-market debt strategy at ING Groep NV. “Investors are going into stocks because they’re more attracted by the companies’ growth prospects and earnings.”

Global funds invested a net $429 million in Brazilian local and international bonds in July, 39 percent of the $1.11 billion poured into stocks, according to research firm EPFR Global. Brazilian equity earnings yields rose to 6.7 percent today, 142 basis points, or 1.42 percentage points, above the average yield for the country’s dollar bonds, according to data compiled by Bloomberg and JPMorgan Chase & Co. Stocks began offering a higher payout in mid-April, reversing a 13-month-long trend.

International bonds are losing favor after a three-month rally drove yields to a record low and a quickening economic expansion bolstered the outlook for corporate profits. Brazil’s dollar bonds gained 3.4 percent in July, compared with an 11 percent advance in the Bovespa stock index, the gauge’s biggest monthly increase since May 2009. Local bonds returned 4.4 percent in dollar terms, JPMorgan’s GBI-EM Global Diversified index shows.

Rate Outlook

Stocks are surging as the central bank reduces the pace of interest-rate increases, boosting the outlook for retailers and banks that depend on credit demand. Policy makers led by bank President Henrique Meirelles raised the benchmark overnight rate by 50 basis points to 10.75 percent at their July 21 meeting, surprising 48 of 51 analysts surveyed by Bloomberg who expected a third straight increase of 75 basis points.

Latin America’s largest economy will grow 7.2 percent this year, according to a central bank survey of 100 economists published July 26.

Investors are also paring holdings of Brazilian bonds on optimism the global economic recovery is strengthening and European countries are moving to reduce budget deficits. Average yields on Brazilian dollar securities tumbled 67 basis points this year to an all-time low of 5.27 percent as of Aug. 4 as rates on U.S. Treasury debt, the benchmark for emerging-market borrowing costs, plunged, according to JPMorgan’s EMBI+ index. Yields were at 5.28 percent yesterday.

“The perceived risk is falling fairly dramatically and investors are trying to get more risk and higher yields,” said John Ditieri, who helps oversee about $13.5 billion in emerging- market equities at Arlington, Virginia-based Emerging Markets Management. “That’s hard to find in the fixed-income space.”

Yield Spread

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries narrowed three basis points to 202 at 5:30 p.m. in New York, according to JPMorgan.

The cost of protecting against a default on Brazilian debt for five years through credit-default swaps fell one basis point to 114, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real fell 0.5 percent to 1.7609 per dollar.

Yields on the interest-rate futures contract due in January fell two basis points to 10.78 percent.


The 2.1 percentage-point advantage of Brazilian earnings over dollar bonds in May marked the biggest gap since December 2008. The earnings yield is the income relative to the company’s share price. Stocks of the MSCI Emerging Markets Index offer a profit return of 6.6 percent, according to data compiled by Bloomberg.

While Brazilian stocks outperformed bonds in July, debt is beating equities for the year. The dollar bonds have gained 9.9 percent while the local debt returned 7.9 percent. The Bovespa has lost 0.7 percent. Global funds invested $3.8 billion in Brazilian bonds this year, almost five times the $774 million that has gone into equities, according to Cambridge, Massachusetts-based EPFR.

“The yields of the Brazilian debt market are still attractive for some investors,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “It’s a combination of high interest rates and a steady currency.”

‘Strong and Sustainable’

Brazilian companies’ second-quarter revenue surprised analysts, with sales exceeding estimates by 22 percent, according to data compiled by Bloomberg. Osasco-based Banco Bradesco SA, Brazil’s second-biggest bank by market value, said second-quarter profit increased 23 percent to 2.46 billion reais ($1.4 billion), beating the mean estimate of 2.26 billion reais in a Bloomberg survey of four analysts.

“The trend of money flowing into equity should continue,” said Fabio Mele Dall’Acqua, who oversees $500 million as managing partner at Constellation Asset Management in Sao Paulo. “It took a couple of quarters of earnings to understand that the case of Brazil is strong and sustainable.”

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