Goldman Bonds Are No Match for Lula in Default Swaps Market: Brazil Credit
The fastest economic growth in two decades is making Brazilian debt safer than Goldman Sachs Group Inc. and Dell Inc., credit default swaps show.
The cost of protecting Brazil debt against non-payment for five years fell to 89 basis points on Oct. 13, the lowest level since May 2008 and 6 below the Markit CDX North America Investment Grade Index that includes Goldman Sachs and Dell, according to CMA DataVision. Brazil’s BBB- rating from Standard & Poor’s is four levels below Goldman Sachs, the world’s most profitable securities firm, and three underneath Dell, the third-biggest maker of personal computers.
Central bankers forecast Latin America’s largest economy will grow more than 7 percent this year for the first time since 1986, and more than twice the pace of expansions in the U.S. and Japan. International investors poured a record $41 billion into developing-nation bonds this year, driving down yields in Brazil, China and other emerging countries, according to research firm EPFR Global.
“There’s a structural change as the credit profile of most emerging-markets, including Brazil, is improving,” said Edgardo Sternberg, an emerging-market debt strategist at Boston-based Loomis Sayles & Co., which manages about $140 billion in assets. “There will be more upgrades down the road.”
Moody’s Investors Service, which raised Brazil to an investment-grade ranking of Baa3 in September 2009, said this month it may revise the country’s rating as soon as March.
The gap between Brazil’s default swaps and the investment grade index on Oct. 13 was the biggest since September 2008, according to CMA. It cost 42 basis points, or 0.42 percentage point, more to insure debt sold by New York-based Goldman Sachs against default than Brazilian bonds and 24 more to protect securities from Round Rock, Texas-based Dell.
Goldman Sachs is rated A1 by Moody’s and A by S&P. Dell is rated A2 by Moody’s and A- by S&P.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Brazil’s default swaps imply a ratings increase of two levels, putting the rating at BBB+, according to Brown Brothers Harriman & Co.
Brazil’s rating outlook was raised on June 28 to positive from stable by Fitch Ratings, which cited the country’s “growth dynamics” and “prudent” policies. Fitch rates Brazil BBB-, the lowest investment grade and in line with rankings from S&P and Moody’s.
Moody’s will review Brazil’s rating when it has access to gross domestic product data next year, Mauro Leos, a senior analyst at the New York-based company, said at an event in Sao Paulo on Oct. 5. Sebastian Briozzo, an analyst with S&P in Buenos Aires, didn’t return a telephone call seeking comment yesterday.
“The markets are pricing that it’s a pretty safe bet that the upgrades will continue for Brazil,” said Win Thin, a senior currency strategist at Brown Brothers in New York.
Ratings companies will likely delay raising Brazil’s ranking until the winner of this month’s presidential election unveils a fiscal plan, said Henry Stipp, a fund manager at London-based Threadneedle Asset Management, which manages about $98 billion of assets.
Rousseff, who would be Brazil’s first female president, has vowed to maintain the social programs and the economic growth that has lifted 21 million people out of poverty since 2003. She said in August that promoting spending cuts was a “crime.”
Serra carried out spending cuts when he was governor of Sao Paulo, Brazil’s wealthiest and biggest state. He has pledged to cut government payrolls and renegotiate prices on public contracts, helping offset plans to boost the minimum wage and payouts to pensioners.
Lula’s government boosted spending 18.2 percent in July from a year earlier, helping push the budget deficit to 3.4 percent of gross domestic product from 1.2 percent in October 2008. Brazil’s gross debt equaled 60 percent of GDP last year, compared with 38 percent in Mexico and 46 percent in Colombia.
“They should wait for after the election since we don’t know what the policies are going to be in Brazil and the fiscal situation is deteriorating,” Threadneedle’s Stipp said.
The risk associated with Brazilian bonds is tumbling as record-low interest rates in the U.S. and Europe boosts demand for emerging-market assets. Policy makers in Brazil raised the benchmark interest rate to 10.75 percent from a record low of 8.75 percent in March.
Governments and companies in developing countries borrowed $196 billion from July to September, the most for any quarter, according to data compiled by Bloomberg. Brazil may consider selling 100-year bonds after Mexico issued $1 billion of the securities in the longest-maturity offering by a Latin American country, Treasury Secretary Arno Augustin said Oct. 14.
Mexico’s Oct. 5 sale of the so-called century bonds signals a “bubble” in credit markets, RBC Capital Markets said in a report two days later.
In the dollar-denominated bond market, yields on Brazil’s 4.875 percent securities due in 2021 have declined 19 basis points in the past month to 3.76 percent. Yields on Goldman Sachs’s 5.375 percent coupon due in 2020 have dropped 22 basis points to 4.69 percent, while yields on Dell’s 5.875 percent bonds due in 2019 declined 11 basis points to 3.79 percent.
Emerging-market debt is “very, very expensive,” said Andrew Brenner, managing director at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “There’s no justification for that. Brazil offers zero value in dollar bonds.”
The real tumbled 1.4 percent to 1.6973 per dollar today. Finance Minister Guido Mantega boosted the tax on foreigners’ fixed-income investments to 6 percent yesterday, two weeks after doubling it to 4 percent, to stem a currency rally. The government is also raising the tax on foreign investors’ margin deposits for futures markets to 6 percent from 0.38 percent.
The real has gained 36 percent since the end of 2008, extending its world-beating rally to 108 percent since Lula took office in 2003. Mantega said last month that governments around the world are engaging in a “currency war” as they attempt to stem capital inflows.
“This currency war needs to be deactivated,” Mantega told reporters yesterday.
Yields on Brazil’s interbank rate futures contract due in January 2012 rose one basis point today to 11.29 percent.
The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries narrowed one basis point to 180, according to JPMorgan Chase & Co.
“You have to place your money somewhere and there’s an adjustment of risk premium in the markets,” said Paul Biszko, an emerging-markets strategist at Royal Bank of Canada in Toronto. “There’s a flush of liquidity into Brazil. It has been a phenomenon now in which nobody assesses the sovereign risk as what the rating agencies do.”
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