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Brazil Futures Yields Fall for Second Day on Rate-Cut Bets

Yields on Brazilian interest-rate futures contracts fell for a second day amid speculation record cash loans to euro-area lenders from the European Central Bank will bolster policy makers’ resolve to lower interest rates.

The yield on the contract due in January 2014 fell two basis points, or 0.02 percentage point, to 9.73 percent. The real dropped the most in more than two months, falling 1.3 percent to 1.7174 per U.S. dollar, from 1.6958 yesterday, following a report the government may implement new measures to stem the currency’s gains.

The ECB said today it will lend 800 financial institutions 529.5 billion euros ($705.7 billion), almost double the median amount estimated by 28 economists surveyed by Bloomberg. The cash will increase demand for higher-yielding Brazilian assets, bolstering the central bank’s goal of cutting borrowing costs to diminish speculative inflows lured by the highest real rates within the Group of 20 nations, said Maristella Ansanelli, chief economist at Banco Fibra SA.

Central bank President Alexandre “Tombini was very clear yesterday in highlighting the question of liquidity and lower rates abroad,” Ansanelli said by phone from Sao Paulo. “This increases the pressure for the central bank to lower borrowing costs.”

‘Expansionary Policy’

Policy makers in the U.S., Europe and Japan are adopting an “expansionary policy” to shore up economic growth in a move that is causing a jump in capital inflows to emerging markets, Tombini said yesterday during Senate testimony in Brasilia.

Brazil’s real extended losses today after a government official told Bloomberg News that Brazil is considering new measures to stem the real’s 8.7 percent gain this year.

The official, who asked not to be identified because a final decision hasn’t been taken, declined to give details on the measures.

Finance Minister Guido Mantega has repeatedly pledged to take all necessary steps to prevent the exchange rate from hurting local manufacturers.

The central bank auctioned 30,500 currency swap contracts worth the equivalent of about $1.5 billion, according to a statement published on the central bank’s Sisbacen system. The bank planned to auction as many as 40,000 contracts.

Brazil’s central bank said it also bought dollars in the spot market at an auction today for 1.7032 reais each, according to a statement.

The bank sold 3,500 reverse currency swap contracts on Feb. 23. It bought dollars in the spot market on Feb. 22.

Brazilian policy makers are seeking to curb gains in the real in a bid to protect exporters and ensure economic growth of at least 4 percent this year.

Cash Loans

Dollar inflows from companies and banks borrowing abroad and the ECB’s record amount of cash loans to euro-area banks today pushed the real below the 1.70 level, spurring the central bank to intervene, said Jorge Lima, a financial consultant at currency brokerage Previbank DTVM.

“The entry of funds is still very strong, and the bank is trying to soften the dollar’s fall,” Lima said in a phone interview from Sao Paulo. “It’s acting so that the move won’t be so strong and so fast, but the tendency is that the dollar weakening will continue.”

Brazil posted its second-widest budget surplus before interest payments on record, as the government tries to rein in spending to allow for further cuts in the benchmark lending rate.

The federal and local governments, including state companies, had a primary surplus of 26 billion reais ($15.1 billion), the central bank said today in a report distributed in Brasilia. The number is the widest since September 2010, when Brazil posted a 28.2 billion reais surplus. The forecast was for a 22.4 billion reais surplus, according to the median estimate of 13 economists surveyed by Bloomberg.

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