Brazil Rate-Futures Yields Fall on Growth Concern; Real Drops

Yields on Brazilian interest-rate futures contracts reached record lows after a report that showed Europe’s economy contracted last quarter spurred bets the central bank will extend its cycle of interest-rate cuts to boost growth in Latin America’s largest economy.

The yield on the contract due in January 2013 dropped two basis points, or 0.02 percentage point, to 9.01 percent. The real accelerated losses, weakening 1.1 percent to 1.7584 per U.S. dollar, after Finance Minister Guido Mantega said the government would maintain a “weaker” currency.

Traders stepped up bets on a longer cycle of rate cuts before this week’s monetary policy meeting as signs the global economy is slowing fueled speculation policy makers will act more aggressively to spur growth. Brazil’s economy expanded 1.4 percent in the fourth quarter, below the 1.5 percent median estimate of 41 analysts surveyed by Bloomberg, the national statistics agency said today. Gross domestic product grew 0.3 percent from the previous quarter, exceeding the 0.2 percent estimate of 42 economists.

“GDP came within expectations and showed that the economy began to recuperate, but only moderately,” Luciano Rostagno, chief strategist at Banco West LB, said by phone from Sao Paulo. “As long as the external environment is bad, the market bets on a longer cycle of rate cuts.”

Europe’s gross domestic product shrank 0.3 percent from the third quarter, the region’s statistics office said today, confirming an initial estimate published on Feb. 15. Exports fell 0.4 percent and household spending declined 0.4 percent.

Central Bank Meeting

Brazilian policy makers trimmed benchmark borrowing costs by 50 basis points in January to 10.5 percent, bringing the rate down 200 basis points since August. Traders are anticipating central bank President Alexandre Tombini will reduce the Selic rate by as much as 75 basis points at the bank’s monetary policy meeting tomorrow, according to rate futures yields.

Moderate growth in Brazil last year and concern that a Greek default could further weaken the European economy also drove down futures yields, said Ines Filipa, chief economist at Icap do Brasil CTVM in Rio de Janeiro.

“The GDP was not a positive surprise, and this also contributes to bets on a bigger Selic cut,” Filipa said in a telephone interview. “Copom will decide one day before the deadline for a Greek restructuring.”

Default Speculation

The real fell with most other major and emerging-market currencies as speculation grew that a Greek default would further limit global growth.

The real earlier fell to as low as 1.7635 per dollar, the weakest level since Jan. 25, after Mantega said Brazil would maintain a “weaker” currency to offset the European debt crisis and slowing global growth.

“We’re going to counterbalance this adverse situation by maintaining a weaker exchange rate in Brazil,” Mantega said on a conference call with reporters today. “We won’t allow the currency to appreciate.”

Mantega also said the government would introduce new measures to stimulate additional growth in 2012.

Brazil’s economy last year registered its second-worst performance since 2003 as higher borrowing costs and a currency that rallied to a 12-year high led it to underperform emerging-market peers China and India.

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