Brazilian Swap Rates Tumble as Real’s Inflation Concern Eases

Brazil’s swap rates fell the most in four years as the real rebounded, easing speculation that a two-month currency rout will spur the central bank to sustain the pace of increases in borrowing costs to curb inflation.

The real climbed for a second day as President Dilma Rousseff called for a plebiscite on political reform after meeting with leaders of the protest group Passe Livre in response to two weeks of street protests demanding improved public services and criticizing corruption. The currency also strengthened as concern eased that a cash crunch in China may undermine the global economy.

Swap rates due in January 2016 fell 46 basis points, or 0.46 percentage point, to 10.82 percent in Sao Paulo after earlier climbing 22 basis points. The drop was the biggest since March 2009, when the world was struggling to recover from the financial crisis. The real appreciated 0.7 percent to 2.2268 per dollar after falling 1 percent. The currency slid to 2.2575 on June 20, the weakest level since April 2009, driving up the cost of imported goods. Yields on the benchmark fixed-rate bonds due in 2023 dropped 36 basis points to 11.27 percent, paring a seven-week rout.

“Rousseff’s meeting with leaders of the Passe Livre movement could have helped the real to gain,” Joao Paulo de Gracia Correa, currency manager at Correparti Corretora, said in a telephone interview from Curitiba, Brazil. “The market abroad is also improving.”

During a televised meeting with governors and mayors, Rousseff called for the plebiscite as well as agreements to quicken investment in healthcare and improve the quality of transportation. She said the government was willing to reduce the tax on diesel and wouldn’t accept vandalism.

Bond Buyback

The government bought back 380 million reais of zero-coupon bonds in a fifth unscheduled offer since June 13 to support its securities. The Treasury purchased 25 percent of so-called LTNs offered amid a global market rout that has intensified in Brazil as the nationwide anti-government protests turned violent.

In a local-bond auction today, the Treasury sold 45 percent of fixed-rate bonds, known as NTN-Fs, that it offered and 77 percent of zero-coupon bonds. In total, it sold 1.1 billion reais of the securities.

Fernando Garrido, the Treasury’s general coordinator, told reporters in Brasilia that the government isn’t planning any more auctions beyond those that are scheduled, after canceling an auction for inflation-linked bonds.

Swap rates rose earlier today as economists in a weekly central bank survey raised their median forecast for year-end inflation to 5.86 percent from 5.83 percent. They lowered their outlook for growth this year to 2.46 percent from 2.49 percent.

The central bank plans to sell up to 66,000 currency swap contracts in an auction tomorrow, according to a statement today.

Inflation Quickens

Consumer prices as measured by the IPCA-15 index rose 0.38 percent in the month through mid-June, the national statistics agency reported June 21. The median forecast of economists surveyed by Bloomberg was for an increase of 0.36 percent. Annual inflation accelerated to 6.67 percent, higher than the 6.50 percent upper level of the central bank’s target range.

The central bank raised its target lending rate by 50 basis points on May 29 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 state of Sao Paulo will suspend a 6.5 percent increase in road tolls that was scheduled to take place July 1, Governor Geraldo Alckmin told reporters today. Sao Paulo and Rio de Janeiro canceled increases in bus, train and subway fares last week after they sparked the street protests, the biggest in almost two decades.

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