Brazilian Swap Rates Decline for Fifth Day to Record; Real Falls

Brazilian swap rates fell for a fifth day, reaching a record, as the South American country’s personal loan default rate matched a 30-month high and Spanish unemployment rose, bolstering bets the central bank will keep borrowing costs low for a prolonged period to support growth.

Swap rates on contracts due January 2014 fell one basis point, or 0.01 percentage point, to 7.33 percent, bringing the weekly decline to nine basis points. The real depreciated 0.1 percent to 2.0270 per dollar. It was little changed this week.

“Brazilians’ indebtedness can have an impact on growth of consumption in the future,” said Flavio Combat, an economist at Concordia Corretora, in a phone interview from Rio de Janeiro. “And Spain with 25 percent unemployment is very worrisome.”

Brazil’s personal loan default rate remained at 7.9 percent in September, matching a 30-month high reached in May.

Spanish unemployment climbed to a fresh record in the third quarter as a deepening recession left one in four workers jobless, adding pressure on Prime Minister Mariano Rajoy to seek a second European bailout.

Swaps traders are overestimating how soon the central bank will reverse course and raise borrowing costs, Paulo Leme, the chief of Goldman Sachs Group Inc.’s Brazil offices, said at an event today in Sao Paulo. The central bank will probably leave rates unchanged through the end of 2013, Leme said.

The central bank will boost borrowing costs by a quarter-percentage point as soon as July, trading in swap rates indicates. Brazilian policy makers cut the target lending rate for a 10th straight meeting to a record low 7.25 percent Oct. 10 to revive the slowest growth among major emerging markets.

Currency Swaps

The central bank sold reverse currency swaps for a second time this week yesterday to support exporters by preventing appreciation.

“There’s a general lack of interest in the Brazilian currency market” following the bank’s interventions, said Italo Abucater, the head of currency trading at Icap Brasil CTVM, in a phone interview from Sao Paulo.

The central bank sold 28,300 of 30,000 reverse currency swaps offered at an auction yesterday, including $1.1 billion worth of contracts due in December and $300 million worth of contracts due in January, according to a statement by the bank.

The bank sold $1.6 billion in reverse currency swaps on Oct. 23, $1.3 billion on Oct. 5, $5.7 billion of contracts Sept. 12 through Sept. 17 and $350 million on Aug. 21 to weaken the real. The August reverse swaps were the first since March.