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Brazil Futures Yields Drop as Inflation Meets Target; Real Falls

Yields on Brazilian interest-rate futures contracts fell for the first time in four days after inflation unexpectedly slowed to within the government’s targeted range last year, prompting bets the central bank has room to speed up interest-rate cuts.

Yields on the futures contract due in January 2013 dropped eight basis points, or 0.08 percentage point, to 10.07 percent. The yields rose 3 basis points this week. The real weakened 0.7 percent to 1.8566 per dollar, paring the weekly gain to 0.5 percent.

Consumer prices rose 6.5 percent last year, the government statistics agency said today, within the upper limit of the government’s targeted range of 2.5 percent to 6.5 percent. Since March, policy makers have repeatedly pledged to slow inflation to a 4.5 percent pace by the end of 2012, while saying that the cost of doing so in 2011 would be “too high.”

“This data brings a bit of relief,” Mauricio Junqueira, who helps oversee about $300 million at Squanto Investimentos, said by phone from Sao Paulo. “It removes a bit of the pressure on futures yields.”

Brazilian consumer prices as measured by the so-called IPCA index rose 0.5 percent in December from a month earlier, slowing unexpectedly from 0.52 percent in November. The annual figure was lower than the median forecast of 6.56 percent among 35 economists surveyed by Bloomberg.

Central bankers have cut the benchmark lending rate 150 basis points since August to shore up the economy. Traders are wagering Tombini will reduce the Selic rate to as low as 10 percent by May, from 11 percent today, according to interest-rate futures yields.

Rate Outlook

Yields on the January 2013 contract reached 10.18 percent on Dec. 26, near a two-month high, after the central bank said it sees some barriers to slowing inflation to target, including household demand and a tight labor market.

Today’s inflation data doesn’t merit betting on a change in the central bank’s rate-cut plan, Junqueira said.

“This will depend a lot on the external scenario,” he said.

The Brazilian real fell on concern that European leaders’ inability to resolve the region’s debt crisis will weaken global growth, Reginaldo Galhardo, head of currency trading at Treviso Corretora de Cambio in Sao Paulo, said in a telephone interview.

“The U.S. numbers were good, but they didn’t help that much,” Galhardo said. “The main worry continues to be Europe, and the quarrels among leaders.”

The currency’s weekly gain was fueled by speculation more dollar borrowings will follow the $2.6 billion of international bond sales by Brazilian companies and the government this week, according to Junqueira.

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