Bloomberg News

Brazil Rate Futures Yields Fall as Europe Debt Crisis Fuels Bets

September 28, 2011

Sept. 28 (Bloomberg) -- Yields on most Brazilian interest- rate futures contracts fell as the deepening debt crisis in Europe fueled bets the central bank will continue lowering borrowing costs.

Yields on the contract due in January 2013 declined two basis points, or 0.02 percentage point, to 10.41 percent at 5 p.m. in New York.

Traders are betting Brazilian central bank President Alexandre Tombini will continue cutting interest rates to shield the economy from a European banking crisis that is hurting global growth. Tombini reduced the benchmark interest rate a half point to 12 percent on Aug. 31, after raising it at the previous five policy meetings, citing a “substantial deterioration” in the global economy.

“This most recent volatility gives the central bank assurance to continue with its monetary policy,” said Luciano Rostagno, head strategist at CM Capital Markets in a telephone interview from Sao Paulo. “The market is beginning to believe in more aggressive cuts.”

The Standard & Poor’s 500 Index of U.S. stocks lost 2.1 percent as investors watched for signs of progress in Europe’s efforts to stem the government debt crisis. The S&P GSCI Index of commodities slumped 2.7 percent.

Traders are betting policy makers will lower the benchmark Selic rate by as much as 75 basis points at their meeting Oct. 19, according to Bloomberg estimates based on interest-rate futures contracts.

Inflation Outlook

“The external scenario goes in hand with what the central bank has been saying in its documents,” Mauro Schneider, an economist with Banif Corretora, said in a telephone interview from Sao Paulo. “This type of environment gives the central bank space to be more aggressive.”

Brazil’s inflation rate will fall before the end of the year to below the 6.5 percent upper limit of the government’s target range, Tombini told reporters in Brasilia yesterday.

Analysts forecast consumer prices will rise 6.52 percent this year, the first time inflation would miss the target since 2003, according to a central bank survey of economists published Sept. 26.

The real declined 1.9 percent to 1.8408 per dollar, from 1.8059 yesterday. The currency has lost 14 percent this month, the worst performer 25 emerging-market currencies tracked by Bloomberg.

Investors will continue seeking dollar-denominated assets instead of reais as long as the European debt crisis roils markets, said Jose Carlos Amado, a currency trader at Renascenca DTVM.

“There’s not a lot of room for the dollar to weaken because of this external uncertainty, because something negative could still come out of Europe,” Amado said in a telephone interview from Sao Paulo.

--With assistance from Ye Xie in New York. Editors: Marie-France Han, Brendan Walsh

To contact the reporters on this story: {Josue Leonel} in Sao Paulo at jleonel@bloomberg.net; {Gabrielle Coppola} in Sao Paulo at gcoppola@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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