Brazil Swaps Rise on Rate Signal; Real Falls as Ibovespa Gains

  • BCB says stubborn inflation leaves no room for monetary easing
  • Currency drops after auction of $500 million in reverse swaps

Brazil’s swap rates rose the most since March on speculation the central bank will refrain from cutting borrowing costs from an almost decade high. The real fell and the Ibovespa advanced.

Swap rates, a gauge of expectations for interest rates, increased after policy makers said stubborn inflation leaves no room for monetary easing. The Ibovespa gained as a rally in miner Vale SA outweighed bank declines. The real fell after the central bank sold all 10,000 reverse currency swaps offered on Thursday, a move equivalent to buying $500 million in the futures market. Brazilian dollar bonds slumped as the nation planned to sell global debt for the first time since March.

Brazilian assets have led world gains this year on speculation that a new government would be able to pull Latin America’s largest economy from its deepest recession in a century and tame inflation that’s almost double the official target. By keeping the benchmark rate unchanged for an eighth straight meeting Wednesday and signaling that prices could edge higher, the central bank indicated that monetary easing could come later than previously expected.

“The statement stressed that there was no room for monetary easing under the baseline scenario and current balance of risks," said Sacha Tihanyi, a senior emerging-market strategist at TD Securities in New York. "We forecast that the first cut from the central bank will come in November."

Swap rates on the contract maturing January 2018 rose 0.16 percentage point to 12.78 percent at the close of trading in Sao Paulo. The real lost 0.4 percent to 3.2719 per dollar. The Ibovespa added 0.1 percent to 56,641.49 as banks slumped, while Vale climbed 3 percent. Yields on Brazil’s $3.55 billion of notes due 2045, the nation’s most-traded bonds, rose to 5.76 percent.

Brazilian stocks fell earlier Thursday on speculation that high interest rates would further hamper economic growth, dimming the outlook for corporate earnings. Sales for Ibovespa companies dropped by an average 13 percent in the first quarter, according to data compiled by Bloomberg.

“One of the biggest long-term obstacles for the Ibovespa is Brazil’s high interest rate,” said Guilherme Affonso Ferreira, a partner at the asset management firm Teorema Investimentos in Sao Paulo. “With the gains provided by fixed income in the country, stock picking is a tough job.”

Brazil plans to issue at least $500 million of notes due in 2047 to yield about 6 percent, according to a person familiar with the matter who asked not to be identified because the information isn’t public. The proposed yield is about 1.5 percentage points above the average for similar-maturity bonds that share Brazil’s BB credit rating, according to data compiled by Bloomberg. The country was cut to junk last year amid a growing budget deficit and wide-ranging corruption probe that ensnared business and political leaders.

After rising 31 percent this year, the Ibovespa’s trading at 12.8 times estimated earnings, which is 14 percent above its three-year average.

Utility Cia Energetica de Minas Gerais surged as it was said to be planning to sell its stake in Light SA, newspaper Valor Economico reported, without saying how it got the information.

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