Brazil’s real-denominated global bonds rallied after the central bank accelerated the pace of interest-rate increases, a move that could stem a currency rout that has eroded returns on the country’s debt.
The yield on government bonds maturing in 2022 dropped nine basis points, or 0.09 percentage point, to 7.18 percent at 4:06 p.m. in New York. The price climbed 67 centavos to 133.62 reais. Markets are closed today in Sao Paulo for a holiday.
“Given the surprise rate hike, a lot of people might be expecting the real to rally tomorrow, so buying the bonds is a way to bet on that move,” Tony Volpon, the head of research for the Americas in New York at Nomura Holdings Inc., said in a telephone interview.
The central bank’s board voted unanimously last night to raise the target lending rate by a half-percentage point to 8 percent to curb inflation, surprising 38 of 57 economists surveyed by Bloomberg who had expected a second straight increase of 25 basis points. The other 19 correctly forecast the half-point increase.
Policy makers raised their target lending rate last month for the first time since July 2011, increasing it to 7.50 percent from a record low 7.25 percent.
“We were all surprised, not just by the extent, but because it was a unanimous decision,” Aryam Vazquez, a global emerging-markets economist at Wells Fargo & Co. in New York, said in a telephone interview. “You had a large selloff in the real yesterday as well, so I think they’re concerned on multiple fronts.”
The real plunged 1.7 percent yesterday to a five-month low of 2.1106 per dollar as Finance Minister Guido Mantega said the selloff isn’t a concern and that the government won’t use the exchange rate as a tool to curb inflation.
The currency has declined 5.2 percent in May, the worst performance among 24 emerging-market currencies tracked by Bloomberg after South Africa’s rand amid signs of sluggish growth and on concern the U.S. Federal Reserve will curtail a stimulus program that has buoyed emerging-market assets. The real has tumbled 2.8 percent this week in what would be its fifth weekly decline.
Mantega, speaking to reporters yesterday in Brasilia after the government reported slower-than-forecast growth in the first quarter, said a weaker real can boost exports.
“Other tools exist to combat inflation,” Mantega said. “This is an international shift, and there’s no reason we should be different.”
Since central bank President Alexandre Tombini took office in January 2011, the annual rate of consumer price increases has remained above the 4.5 percent midpoint of policy makers’ target range of 2.5 percent to 6.5 percent. Yearly inflation accelerated to 6.59 percent in March before easing to 6.49 percent last month.
The Ibovespa benchmark stock index has declined 10 percent this year, the worst performance among major emerging-market stock gauges, amid concern quickening inflation is curbing the economic recovery.
Latin America’s largest economy grew 1.9 percent in the first quarter from a year earlier after expanding 1.4 percent in the previous period, the national statistics agency reported yesterday. The median forecast of analysts surveyed by Bloomberg was for gross domestic product growth of 2.3 percent.
The half-point move “was kind of surprising, especially after the GDP announcement,” Klaus Spielkamp, a fixed-income trader at Bulltick Capital Markets, said by phone from Miami. “They did the 50 basis points for two reasons: inflation, of course, and the fact that the real is devaluing above 2.10. I think they don’t want it too far from 2.”
Nilson Teixeira, a research analyst at Credit Suisse Group AG in Sao Paulo, said in a report published today that he expects the central bank to raise the target lending rate by another 75 basis points this year, with increases at the July and August meetings. Capital Economics analyst Michael Henderson in London said in a report that there’s a “significant possibility” of a further rate increase at the next monetary policy meeting in July, with the outlook becoming “far less certain” beyond that.