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Beating Stagflation Lifts Brazil to Turkey Bids for Linkers

Beating Stagflation Boosts Brazil to Turkey Demand for Linkers
Poland’s 10-year breakeven rate suggests that inflation will fall to 2.51 percent from 3.8 percent last month after policy makers unexpectedly kept borrowing costs at 4.75 percent for a fourth straight meeting on Oct. 3. Photographer: Bartek Sadowski/Bloomberg

Growth is so slow in emerging markets that central bankers are tolerating faster inflation to stimulate their economies, driving investors to debt linked to consumer prices at the fastest pace in two years.

Average inflation in the 15 largest developing economies accelerated to a seven-month high of 4.3 percent in September, data compiled by Bloomberg show. The yield gap between Brazil’s 10-year benchmark fixed-rate notes and bonds indexed to consumer prices surged 56 basis points in the past three months through yesterday, the biggest increase since 2010, to 5.99 percent. The gap rose 108 basis points, or 1.08 percentage points, in Turkey to 6.09 percent and 63 in South Africa to 5.52 percent.

The widening gap, a sign of inflation expectations, shows investors expect policy makers to keep interest rates low and shore up growth as the International Monetary Fund says the risk of a global recession is “alarmingly high.” Thailand’s central bank unexpectedly cut benchmark interest rates today, one week after Brazil reduced borrowing costs to a record 7.25 percent and signaled the intention to hold the benchmark down for a “prolonged period” as the economic outlook deteriorates.

“When they have to choose between growth and inflation, growth has become more important than it has been in the past five years,” Guillermo Osses, who oversees $12 billion assets as head of emerging-market debt at HSBC Asset Management, said in a phone interview from New York on Sept. 28. “We start to see inflation slowly picking up.”

Osses said he bought inflation-linked bonds of Turkey and Brazil over the past two months.

Commodities Surge

Emerging-market inflation-linked bonds, which pay investors interest rates that rise with consumer prices, returned 5 percent in the third quarter, the biggest gain in more than two years, data compiled by Bank of America Corp. show. The securities have advanced 15 percent in 2012, compared with a 6.5 percent gain in U.S. inflation-linked debt and an 8.9 percent increase in fixed-rate bonds in developing countries.

In the U.S., the 10-year breakeven rate reached a 17-month high of 2.64 percent on Sept. 14, one day after the Federal Reserve announced plans to buy $40 billion of assets per month in a third round of so-called quantitative easing. The rate was at 2.46 percent yesterday, compared with an average of 2.1 percent in the 10 years through 2011.

Bond-buying programs in the U.S., Europe and Japan are flooding the global economy with cash to stimulate growth and contributing to the 14 percent increase in commodity prices since June. The Standard & Poor’s GSCI Index of raw materials has advanced 5.3 percent over the past three months, the biggest jump in more than a year.

Stagflation Risk

Developed countries’ monetary policies are “creating the risk of a stagflationary environment,” Arko Sen, a debt and currency strategist at Bank of America, said in a phone interview from London on Oct. 10, referring to the phenomenon of slower economic growth accompanied by higher inflation. The Charlotte, North Carolina-based bank recommends buying linkers in Brazil, South Africa and Turkey, he said.

The highest inflation rate since March for emerging markets is temporary, the Washington-based IMF said Oct. 8, urging policy makers to focus on delivering stimulus to support economic growth. The lender said Turkey’s growth rate will drop to 3 percent from 8.5 percent in 2011, the biggest slowdown after Argentina among the Group of 20 biggest nations. Brazil will expand 1.5 percent this year, the second slowest growth since 2003.

Polish Exception

“I don’t think that the main issue for emerging-market policy makers is inflation at the moment,” said Roberto Sanchez-Dahl, who oversees $1.4 billion of emerging-market debt at Federated Investment Management Co., said by phone from Pittsburgh on Oct. 9.

Poland is an exception. The nation’s 10-year breakeven rate suggests that inflation will slow to 2.51 percent from 3.8 percent last month after policy makers unexpectedly kept borrowing costs at 4.75 percent for a fourth straight meeting on Oct. 3. The central bank raised the benchmark interest rate in May, the only country in the European Union to boost borrowing costs this year. Central bank Governor Marek Belka told reporters Oct. 3 that he wants to make sure inflation will keep decelerating.

Brazil Rates

Brazilian central bank President Alexandre Tombini has lowered the benchmark rate 5.25 percentage points since August 2011, the biggest reduction among the G-20. Annual inflation quickened to a seven-month high of 5.3 percent in September, marking the 25th straight month that the rate was above the central bank’s 4.5 percent main target.

The global slowdown will slow price increases over the next few years, Tombini told reporters on Oct. 15 in Tokyo. The central bank declined to comment on its monetary policy outlook in an e-mailed statement.

Turkey’s central bank reduced the overnight lending rate by 150 basis points to 10 percent last month. Inflation rose to a five-month high of 9.2 percent in September, almost double the bank’s target of 5 percent, after the government raised taxes on fuel and cars.

Turkish central bank Governor Erdem Basci said in a speech on Sept. 13 that price stability is an “essential component” for economic growth.

In Thailand, 10-year breakeven rates increased 39 basis points over the past three months, the biggest advance since March, to 2.51 percent, data compiled by Bloomberg show.

Support Growth

The Bank of Thailand lowered its one-day bond repurchase rate by 25 basis points to 2.75 percent today, after central bank Governor Prasarn Trairatvorakul said in an Oct. 13 interview that there was no need for a rate cut. All but three of 23 economists in a Bloomberg survey had expected no change.

Central bank Chairman Virabongsa Ramangkura said in a speech in Bangkok on Aug. 7 that the country’s inflation-targeting system is inappropriate and that monetary policy should be used to support growth. Trairatvorakul told reporters in Bangkok 10 days later that there is no better course than inflation targeting.

Consumer prices in the Asian country rose 3.38 percent last month from a year earlier, the fastest pace since March. Inflation remains “benign,” Trairatvorakul said in the interview in Tokyo on Oct. 13.

In South Africa, the 5.52 percent breakeven rates shows investors anticipate higher inflation after strikes in the mining industry that started in August pushed up wages and caused an 8 percent drop in the rand against the dollar. Consumer prices rose 5 percent in August.

‘Deteriorating Rapidly’

South African Reserve Bank Governor Gill Marcus said in a speech at Rhodes University in the southern town of Grahamstown on Oct. 10 that the economic outlook is “deteriorating rapidly” as strikes spread, fueling speculation that she will lower borrowing costs for a second time since July. The central bank’s press office didn’t return calls and e-mails for comment.

Speculation that looser monetary and fiscal policies across the world may lead to higher inflation spurred Kieran Curtis, who helps oversee $4 billion in emerging-market debt at Aviva Investors Ltd., to buy inflation-linked bonds in countries including Brazil, Turkey and Thailand over the past two months.

“You definitely have a higher probability of inflation in a low-growth environment given the stance of the policy around the world,” Curtis said in a phone interview on Oct. 2 from London. “You don’t need growth to get inflation.”

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