Bloomberg News

Brazil Futures Yields Fall on Rate-Cut Bets; Real Declines

November 07, 2011

Nov. 4 (Bloomberg) -- Yields on most Brazilian interest- rate futures contracts fell as traders bet the central bank will extend its interest rate-cutting cycle amid signs growth in Latin America’s largest economy is slowing.

Yields on the contract due in January 2013, the most actively traded today, fell five basis points, or 0.05 percentage point, to a one-month-low of 10.22 percent at 3:25 p.m. in Sao Paulo. The yield on the contract, known as DI, has fallen 12 basis points this week, extending its decline in the past three months to 213 basis points.

Speculation mounted that the central bank will deepen rate cuts after European Central Bank officials yesterday lowered their benchmark borrowing costs as the ECB’s new president said the region is heading toward “a mild recession.” Car sales in Brazil declined for a second month in October and a basket of international commodities tracked by the central bank fell, data showed this week, reinforcing policy makers’ view that inflation has peaked.

“Since yesterday, when the ECB cut rates and lowered its forecast for the European economy, the DI is trending downward,” Mauricio Junqueira, who helps oversee about $300 million at Squanto Investimentos in Sao Paulo, said in a telephone interview. “The Brazilian central bank has repeated that it will make moderate adjustments in rates. For this reason, it’s more likely that the cycle of cuts will be longer.”

IOF Tax

The central bank has lowered its key Selic rate twice since August, bringing it down 100 basis points to 11.5 percent in an effort to protect Brazil from the global slowdown without stoking inflation. Central bank President Alexandre Tombini said Oct. 31 that “moderate” rate reductions are consistent with inflation slowing to the government’s 4.5 percent target in 2012. Consumer prices rose 7.1 percent in the year through mid- October.

Yields on interest-rate futures contracts indicate traders expect cuts of at least another 125 basis points by April.

The real fell 0.4 percent to 1.7443 per dollar, from 1.7375 yesterday. It has lost 4.1 percent this week, heading to the biggest weekly decline since September.

Brazil’s tax agency published rules governing how to charge and collect the so-called IOF tax on some currency derivatives contracts in today’s official gazette. The government imposed a 1 percent IOF tax in July after the real strengthened to a 12- year high of 1.529 per dollar.

Brazil’s economy will grow about 5 percent next year, a level which is “perfectly compatible” with the country’s inflation target, Deputy Finance Minister Nelson Barbosa said. Estimates by market economists that the economy will grow 3.5 percent next year were pessimistic, Barbosa told reporters in Sao Paulo.

The central bank estimates commodity prices fell 3.29 percent in October from September, the biggest decline in three months, according to a report posted on its website yesterday. The index is based on a basket of international commodities that the central bank considers most relevant to Brazilian consumer prices, such as soy and iron-ore.

--With assistance from Ye Xie in New York. Editors: Glenn Kalinoski, 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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