Brazil Interest Rate Futures Yields Fall on European Outlook

Yields on Brazil’s interest-rate futures contracts fell on speculation additional austerity measures in Europe may slow global economic growth and create room for lower borrowing costs in the South American nation.

The yield on the contract due in January 2013 slid five basis points, or 0.05 percentage point, to 9.45 percent. The real was little changed at 1.7256 per dollar.

Greek Prime Minister Lucas Papademos is meeting political leaders today to discuss the implementation of additional fiscal measures needed to secure a second European Union-led bailout. In Mumbai last week, Brazil’s central bank President Alexandre Tombini said Latin America’s biggest economy still has “some room” to cut rates from their current 10.5 percent.

“The external scenario is putting downward pressure on rates,” Mauricio Nakahodo, senior economist at CM Capital Markets in Sao Paulo, said by phone. “The euro zone could affect the economic recovery, opening space for lower interest rates in Brazil.”

Tombini has cut benchmark borrowing costs 2 percentage points since August to protect Brazil from the European debt crisis. Tombini told reporters on Feb. 2 that the Brazilian economy has grown less than its potential in the past two quarters, giving policy makers “room to reduce rates.”

Interest-rate futures show traders are betting the central bank will cut the benchmark rate to 9.25 percent by July, according to data compiled by Bloomberg.

Inflation Bonds

Brazil’s Treasury sold 1.3 million inflation-linked bonds due in 2016, 2018, 2022, 2030, 2040 and 2050.

The real’s gain is being limited by the central bank’s dollar buying, said Alfredo Barbutti, an economist at Liquidez DTVM Ltda. The real has gained 8.2 percent this year, following an 11 percent drop in 2011.

“The central bank is the only buyer of all the dollars that are entering the country,” Barbutti said by phone from Sao Paulo. The bank’s actions make investors more cautious about betting on the real’s appreciation, Barbutti said.

Policy makers bought dollars in the foreign-exchange market for a second day yesterday, paying an average of 1.7170 reais each for an unspecified amount. The central bank bought dollars in the forwards market on Feb. 3, part of an effort by the government to curb the real’s appreciation this year and protect local exporters.

Ensuring Growth

Finance Minister Guido Mantega said Jan. 23 that the government will keep implementing policies aimed at preventing currency gains in a bid to ensure economic growth of at least 4 percent this year.

While positive economic data in the U.S. and China have boosted investor appetite for emerging-market assets, the central bank’s interventions make it difficult to bet on further appreciation of the real beyond 1.70, HSBC Holdings Plc analysts Clyde Wardle and Marjorie Hernandez wrote in a Feb. 6 report.

“We would expect Brazil’s central bank to continue efforts to prevent the real from strengthening unchecked,” the New York-based analysts wrote. “While the Brazilian central bank is generally reluctant to draw lines in the sand at particular spot levels, it appears the 1.60 - 1.70 could be a soft target.”

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