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Brazil Futures Yields Drop to Record Low After Employment Report

Yields on Brazilian interest-rate futures contracts fell to a record low after industrial employment declined in April, adding to speculation policy makers will sustain the pace of reductions in borrowing costs.

The central bank lowered the target lending rate by a half-percentage point to a record low 8.50 percent last month and signaled it will reduce the benchmark further as a fragile global economy slows inflation.

“The industrial employment number is weighing on the rates market,” Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA in Sao Paulo, said in a phone interview. “The central bank may reduce rates again in July and leave the door open for more cuts.”

Yields on the interest-rate futures contract due in January dropped two basis points, or 0.02 percentage point, to 7.73 percent at 6 p.m. in Sao Paulo. It earlier touched a record low 7.70 percent. The real fell 0.2 percent to 2.0684 per dollar.

The real erased gains today as investors abandoned bets that the central bank would auction currency swaps, according to Reginaldo Galhardo, head of currency trading at Treviso Corretora de Cambio in Sao Paulo.

The central bank sold currency swap contracts yesterday for the eighth time since mid-May to stem declines in the real spurred by concern Europe’s sovereign-debt crisis will erode global growth.

Currency Swaps

Brazil’s central bank sold 8,000 of 40,000 currency swap contracts for a total of $400 million at an auction yesterday, according to a statement.

The swaps are a reversal of the bank’s dollar purchases, which reached $7.2 billion in April, the most in 13 months, to bolster exports by weakening the currency.

Brazil’s industrial employment fell 1.4 percent in April from a year earlier, the Brazilian Institute of Geography and Informatics reported.

The world’s biggest emerging market after China will expand at a slower rate of 2.53 percent this year, according to the median estimate in a central bank survey of about 100 analysts published this week. A week earlier, analysts expected an expansion of 2.72 percent.

HSBC Holdings Plc cut its estimates for Brazil’s economic growth in 2012 to 2.5 percent, below last year’s 2.7 percent expansion, according to an e-mailed report today.

The bank’s analysts also reduced their estimate for gross domestic product in 2013 to 3.8 percent from 4 percent, citing “evidence of weak investment and signs that the services sector may be faltering.”

Brazil’s annual inflation rate slowed in May more than economists forecast, dropping below 5 percent for the first time since 2010.

Prices, as measured by the benchmark IPCA index, rose 4.99 percent last month from a year earlier, the national statistics agency said June 6. The median forecast in a Bloomberg News survey of analysts was for a 5.06 percent increase.

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