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Brazil Creates Libor for New Fixed Income Benchmark

Dec. 21 (Bloomberg) -- Brazil is introducing two benchmark interest rates that will be the local versions of the London interbank offered rate, or Libor, part of an effort to wean investors off overnight lending market returns and spur sales of longer-term bonds.

BM&FBovespa SA, the operator of Latin America’s biggest securities exchange, will publish three- and six-month rates on a daily basis starting in January, said Sergio Goldenstein, director of fixed income and foreign exchange, in an interview yesterday from Sao Paulo. The new rates will be based on futures contracts on interbank rates traded on the BM&FBovespa, he said.

“We’re going to help develop the secondary market, lengthening maturities,” Goldenstein said.

The creation of new short-term benchmark interest rates is part of measures announced last week by Finance Minister Guido Mantega to stimulate the domestic corporate debt market, including tax cuts. The new reference rates are designed to gradually replace the interbank overnight rate, known as CDI, as a benchmark for all floating-rate debt, Goldenstein said.

The plan aims to foster longer-term financing currently provided by the state development bank, or BNDES. The government says it expects the effort will help boost sales of corporate bonds to 70 billion reais ($41.2 billion) annually from 41 billion reais this year.

Hyperinflation Legacy

The use of an overnight rate as a benchmark for all fixed-income investments is a legacy of hyperinflation, which required daily indexing to protect the value of assets, he said. Brazilian consumer prices rose as much as 6,821 percent annually in April 1991. Inflation is running at 5.6 percent now.

The first sign that investors are willing to switch away from the CDI overnight rate in floating-rate bonds was a 1 billion-real bond sold by the development bank last week whose coupon will be a fixed spread over the interbank futures rate for the next three months, said Goldenstein. Demand was three times the size of the offer, he said.

Brazil’s government has about 1 trillion reais of debt linked to the overnight rate, including repurchase agreements with treasury notes, according to Goldenstein.

“Breaking with this culture will be a gradual process,” he said.

To contact the reporter on this story: Arnaldo Galvao in Brasilia at

To contact the editor responsible for this story: Francisco Marcelino at

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