May 17 (Bloomberg) -- Yields on Brazilian interest-rate futures touched record lows as European debt concerns flared and U.S. factory data that trailed forecasts fueled bets policy makers will extend borrowing-cost cuts amid weakening growth.
Futures yields declined, reversing an earlier climb, after Moody’s Investors Service downgraded Spanish banks and the Philadelphia-region manufacturing data bolstered bets central bank President Alexandre Tombini will deepen rate cuts this year to bolster growth in Latin America’s largest economy. Brazil’s real erased earlier gains, falling below 2 per dollar for a third day, the lowest level in almost three years.
“The external scenario got a lot worse,” Solange Srour, the chief economist at BNY Mellon ARX Investimentos, said by phone from Rio de Janeiro. “The central bank already signaled that it will change its mind in accordance with the environment.”
The yield on the interest-rate futures contract due in January 2014 fell three basis points, or 0.03 percentage point, to 8.18 percent today in Sao Paulo. Earlier it touched 8.15 percent, a record low. The real depreciated 0.4 percent to 2.0087 per U.S. dollar, after reaching 2.0122 earlier, the weakest level since July 2009.
The central bank has reduced Brazil’s target lending rate by 3.5 percentage points since Aug. 31 to 9 percent, the most among the world’s 25 largest economies, according to data compiled by Bloomberg. Policy makers may reduce the benchmark below the record low 8.75 percent to 8 percent by the end of August 2012, trading in interest-rate futures shows.
Policy makers said further cuts to the target Selic rate will be carried out “with parsimony,” in minutes to the central bank’s April 17-18 meeting.
Rate Cut Cycle
The yield on the interest-rate futures contract due in January 2014 has tumbled 58 basis points this month as political instability in Europe fueled speculation Brazil’s central bank will lengthen the interest-rate cutting cycle that began in August.
High interest rates that are “incompatible” with the rest of the world pose an obstacle to faster economic growth, President Dilma Rousseff said May 15 in Brasilia.
Rate futures rose earlier today after the national statistics agency said the volume of retail sales rose 12.5 percent in March from a year earlier, the fastest pace since March 2010. The median forecast of analysts in a Bloomberg News survey was for an increase of 11.7 percent.
The real headed for its sixth consecutive weekly loss after the Federal Reserve Bank of Philadelphia’s general economic index decreased to minus 5.8 in May, indicating an unexpected contraction in manufacturing. Economists said the gauge would raise to 10.
The currency has traded weaker than 1.90 per dollar since April 30 as the central bank bought $7.2 billion in the spot market in April, the most since $8.4 billion purchased in March 2011.
“The market continues to be very volatile,” Hideaki Iha, a currency trader at Fair Corretora de Cambio e Valores, said by phone from Sao Paulo. “Problems in Greece and Spain are worsening.”
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