Brazil Rate-Futures Yields Fall to Record on Shrinking Industry

Yields on Brazilian interest-rate futures contracts dropped to a record low on speculation the central bank will deepen cuts in borrowing costs after a report showed industrial production fell more than economists forecast.

Yields on the futures contract due in January 2014 fell two basis points, or 0.02 percentage point, to 7.82 percent in Sao Paulo after touching a record low 7.79 percent. The real snapped a two-day gain, depreciating 1.5 percent to 2.0155 per U.S. dollar, the biggest loss in almost two weeks.

Output declined 0.9 percent in May from a month earlier, the national statistics agency said today in Rio de Janeiro. Economists had expected a decline of 0.6 percent, according to the median forecast in a Bloomberg survey of 40 analysts.

“The industrial sector is what suffers most from the global deceleration, which the market should be interpreting as a possibility for more stimulus,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento, said in a phone interview from Sao Paulo.

The real rallied yesterday to a level stronger than 2 per dollar for the first time in a month after the central bank supported it with currency swap auctions three times last week. The bank has sold the swaps on 11 days since May 18 for $16.8 billion, according to data compiled by Bloomberg.

The swaps are a reversal of the bank’s dollar purchases, which increased to $7.2 billion in April, the most in 13 months, to weaken the currency and support the country’s exporters. The bank abandoned those purchases in May.

‘Surprised Again’

“We could be surprised again by the central bank,” Italo Abucater, head of currency trading at Icap do Brasil CTVM, said in a phone interview from Sao Paulo. “If the real rises above 1.95 per dollar, we could see the bank buying dollars again.”

Brazil’s gross domestic product expanded 2.7 percent in 2011, down from growth of 7.5 percent in 2010. Analysts surveyed by the central bank reduced their 2012 growth forecast for an eighth week to 2.05 percent, a report showed yesterday.

The central bank has cut its target lending rate by 4 percentage points since August, the most among Group of 20 nations, to a record low of 8.5 percent. Traders are betting policy makers will reduce the benchmark to 7.75 percent by the end of next month, interest-rate futures yields indicate.

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