Real-Linked Bond’s 13% Wipeout Hits Foreigners: Brazil CreditGabrielle Coppola
Foreign investors are dumping Brazilian real-denominated bonds sold overseas after the currency posted the second-biggest plunge in emerging markets.
Yields on the country’s real-linked debt due in 2028 have jumped 1.12 percentage points in the past month, touching a record 8.73 percent on June 3. The bonds lost 13.4 percent in dollars in the period, the worst among local-currency government notes issued abroad after Peruvian debt. That exceeds the 12.3 percent loss in real-denominated bonds issued locally, which foreigners had shunned because of taxes. The government pared back those taxes late yesterday, eliminating a levy on foreign investment on fixed-income assets that was implemented to slow the real’s rally in 2009.
Investors are fleeing Brazil’s $6.4 billion market for overseas real bonds after the real sank 6.5 percent in May, the most among developing nations after South Africa’s rand and part of a global selloff sparked by concern the Federal Reserve could trim its bond buying. While central bank President Alexandre Tombini intervened for the first time in two months to shore up the real after it fell to a four-year low on May 31, he said this week the slide will have a limited effect on inflation, fueling speculation he’s comfortable with the currency’s level.
“It will be difficult to get back the flows,” Donato Guarino, a Latin America strategist at Barclays Plc, said by telephone from New York. “You need to find a catalyst to say these assets are going to go up in value.”
The central bank declined to comment.
The real was little changed yesterday at 2.1251 per dollar after central bank director Aldo Mendes said that there is nothing the bank can do as long as the currency’s depreciation is linked with that of its peers. Finance Minister Guido Mantega said later he was removing the 6 percent tax on foreigners’ purchases of local debt because the Fed’s signaling that it could cut back monetary stimulus has reduced the “excess liquidity” that Brazil was seeking to keep out.
As of April, foreigners held about 269 billion reais ($126 billion), or 14.55 percent, of the Brazilian government’s real-denominated debt sold in the domestic market. That compares with 273 billion reais in March and 220 billion reais a year ago.
Brazil’s central bank sold 17,600 currency swap contracts worth $877 million on May 31 to stem the real’s decline. The intervention was the first in the foreign-exchange market since March 27, when it sold $995 million worth of swaps contracts.
“Our depreciation has been more moderate than some other countries,” Tombini said in a June 2 interview at a conference in Istanbul. “As far as pass-through to inflation, provided the exchange regime is flexible, as is the case in Brazil,” it should be limited.
Annual inflation, which was 6.49 percent in April, has remained above the 4.5 percent midpoint of the central bank’s target range since Tombini took office in January 2011.
“Foreign-exchange intervention will be less aggressive going forward,” Flavia Cattan-Naslausky, a strategist at Royal Bank of Scotland Group Plc, said in a telephone interview from Stamford, Connecticut.
Marco Aurelio de Sa, head of the trading desk at Credit Agricole SA’s brokerage unit, says real-denominated assets are cheap with the currency trading above 2.1 per dollar. The yield gap between Brazil’s overseas bonds and its local debt will widen as the central bank raises interest rates, boosting the allure of the securities, he said.
Brazil’s real-linked bonds due in 2022 yield 272 basis points, or 2.72 percentage points, less than similar-maturity notes sold locally, according to data compiled by Bloomberg.
The central bank’s board voted unanimously on May 29 to raise the target lending rate by a half-percentage point to 8 percent, surprising 38 of 57 economists surveyed by Bloomberg who had expected a second straight quarter-point increase.
“For those willing to take new positions, it’s attractive,” de Sa said by phone from Miami.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell one basis point to 208 basis points at 11:02 a.m. in New York, according to JPMorgan Chase & Co. indexes.
The cost of protecting Brazilian bonds against default for five years was unchanged at 150 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.
Yields on interest-rate futures contracts due in January rose three basis points to 8.48 percent.
Faltering economic growth is also reducing investor demand for real-linked government bonds, according to Edwin Gutierrez, who helps oversee $12 billion at Aberdeen Asset Management.
Latin America’s largest economy expanded 0.55 percent in the first quarter, less than the 0.9 percent median forecast in a Bloomberg survey. Analysts cut their 2013 growth forecast for a third consecutive week to 2.77 percent, according to a central bank survey published June 3.
“The Brazil story is just not as good as it used to be,” Gutierrez said by phone from London. “It’s not getting the same support for balance of payments. The current account deficit is no longer financed by foreign-direct investment. There are enough flows going out of Brazil these days that more than offset the inflows.”
Brazil’s current account gap was the widest in almost 11 years in April.
The slump in the government bonds may also make it harder for Brazilian companies looking to sell real-denominated bonds abroad, Aberdeen’s Gutierrez said.
BRF SA, Brazil’s largest food company, sold 500 million reais of real-linked bonds last month with a 7.75 percent coupon. The bonds have fallen 3.7 cents since May 21 to 95.87 cents on the dollar, pushing the yield up 94 basis points to 8.79 percent, according to data compiled by Bloomberg.
“When sovereign bonds are doing so poorly, and everyone knows liquidity on this stuff is going to be non-existent, no one has much appetite,” Gutierrez said. Liquidity in offshore real bonds is “horrendous,” he said.