Sell Brazil Bonds, Buy Mexico, Bank of America Says (Update4)
March 09, 2010, 6:03 PM EST(Updates prices starting in third paragraph.)
By Camila Fontana
March 9 (Bloomberg) -- Bank of America Corp. recommended selling Brazil’s debt before October’s presidential election and buying Mexican dollar-denominated bonds on the outlook for a U.S. economic recovery and oil revenue.
“Spreads are too tight ahead of the elections” in Brazil, Daniel Tenengauzer, the New York-based head of emerging-market fixed income and currency strategy at Bank of America, wrote in a research report dated today. “Mexico should continue to outperform as U.S. manufacturing boosts Mexico’s economic performance and oil revenues boost external and fiscal accounts.”
The extra yield investors demand to own Brazilian dollar- bonds instead of U.S. Treasuries has shrunk to 1.85 percentage points from 4.53 percentage points a year ago and was 1.83 percentage points yesterday, the narrowest since June 2008, according to JPMorgan Chase & Co. indexes. The spread on Mexican debt has narrowed to 1.32 percentage points from 4.20 points a year ago.
Yield spreads will fall more for Mexican bonds than for Brazilian debt over the course of the year, Tenengauzer said in a telephone interview from New York.
“Mexico has been working hard in the fiscal area to avoid a credit downgrade,” he said. “Brazil has an election coming up and an expansionary fiscal policy.”
Bank of America cut Brazil’s debt to “underweight” from “market weight” and boosted Mexico’s bonds to “overweight” from “underweight.”
Election Outlook
Sao Paulo State Governor Jose Serra leads Dilma Rousseff, President Luiz Inacio Lula da Silva’s cabinet chief and chosen successor, by four percentage points, ahead of the Oct. 3 national election, according to a Datafolha poll published last month. That’s down from 14 percentage points in December. The Datafolha poll gave Serra the support of 32 percent of voters and 28 percent for Rousseff.
In 2002, concern that Lula, a former union leader, would win the presidency, swell spending and sink the country into default led to a plunge in the nation’s bonds and currency. Lula instead cut government expenses upon taking office in January 2003, helping trim the deficit to the equivalent of 2.8 percent of gross domestic product by 2004 from 4.4 percent in 2002.
Economic Program
“Back in 2002, the risk was really of a change in the political regime,” said Tenengauzer. “Now the risk is over who will head the central bank and the finance ministry. There is also uncertainty about the candidates’ economic program and choice of vice presidents.”
In the U.S., the buyer of about 80 percent of Mexico’s exports, manufacturers increased production and employment in February, according to the Institute for Supply Management, signaling factories are leading the nation out of recession.
Mexico’s government forecasts gross domestic product will expand 3.9 percent this year after contracting 6.5 percent in 2009, the worst annual slump since 1932. Crude oil, which has advanced 2.5 percent this year, is Mexico’s largest export and accounts for 40 percent of government revenue.
Mexico’s peso strengthened 0.5 percent to 12.6208 per U.S. dollar at 5:50 p.m. New York time, extending its advance this year to 3.7 percent. Brazil’s real gained 0.7 percent to 1.7757 per dollar, paring this year’s drop to 1.8 percent.
The cost of protecting Brazilian bonds against default for five years dropped to 1.17 percentage points today, the lowest in two months, according to CMA DataVision prices. That’s less than the 1.41 percentage points it costs to protect Russian bonds, which are rated two levels higher than Brazilian debt by Moody’s Investors Service, and the 1.32 points it costs to insure South African debt, which is rated three notches higher.
A basis point on a credit-default swap contract protecting $10 million of debt from default for one year is equivalent to $1,000 a year. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country fail to adhere to its debt agreements.
--Editors: Eric Martin, Lester Pimentel
To contact the reporter on this story: Camila Fontana in Sao Paulo at cfontana@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos in New York at papadopoulos@bloomberg.net
