Brazil Government Yields Fall After Auctions Canceled

Brazilian government bond yields extended their drop from a four-year high after the Treasury canceled auctions of fixed-rate and zero-coupon bonds amid a selloff in emerging-market assets.

Yields on local bonds maturing in 2017 declined 17 basis points, or 0.17 percentage point, to 12.81 percent at 6:14 p.m. in Sao Paulo after increasing Feb. 3 to 13.14 percent, the highest since January 2010. The real appreciated 0.1 percent to 2.4024 per U.S. dollar as Brazil posted a foreign-exchange inflow of $1.6 billion in January.

Demand for developing-nation assets has fallen on speculation the Federal Reserve will further taper monetary stimulus and amid signs of a China slowdown. Brazil’s cancellation was the first in seven months and comes after Russia scrapped a bond auction for a second straight week following a rout that sent yields to record highs.

“There is pressure across emerging markets, and there are doubts in Brazil about fiscal policy,” Carlos Kawall, an economist at J. Safra in Sao Paulo and a former Treasury official, said by phone. “The Treasury contributed to reducing volatility by not offering bonds because when the Treasury borrows more, the market tendency is to bring up rates.”

The Treasury cited market conditions for its decision and said the last time it canceled auctions to sell zero-coupon LTNs and fixed-rate NTN-Fs was in July. The government had planned to offer zero-coupon bonds maturing in 2014, 2016 and 2018 and fixed-rate bonds maturing in 2021 and 2025.

Budget Deficit

Brazil canceled the offerings even as the government budget deficit increased in December to 3.3 percent of gross domestic product, almost the widest in four years.

“The market is reacting calmly and sees that the Treasury is not desperate to refinance its debt,” Ricardo Ramos, a trader at Icap do Brasil in Sao Paulo, said by phone.

Investors pulled $4.6 billion from developing-nation-dedicated bond funds this year through Jan. 29, already a third of 2013’s total outflows, according to Barclays Plc and EPFR Global data.

The real fell 4.7 percent in the past three months after Moody’s Investors Service and Standard & Poor’s cited deteriorating finances when they cut their outlooks on the nation’s credit grade last year. Brazil is rated two levels above junk at BBB by S&P and an equivalent Baa2 by Moody’s.

To bolster the currency and limit import price increases, the central bank sold $197 million of foreign-exchange swaps today under daily offerings announced Dec. 18. Auctions to extend maturities on swaps due in March will start tomorrow.

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