Bloomberg News

Brazil Futures Yields Rise as Growth Rally Spurs Inflation Bets

March 13, 2012

Yields on Brazilian interest-rate futures rose for a second day as signs of a global economic rebound fueled speculation inflation in the Latin American country may accelerate later this year.

The yield on the contract due in January 2013 rose two basis points, or 0.02 percentage point, to 8.70 percent. The real rose 0.3 percent to 1.7922 per dollar, paring an earlier loss of as much as 1.6 percent after Finance Minister Guido Mantega refrained from announcing further measures to limit the currency’s gains in his initial comments in the Senate today.

Stocks jumped after U.S. retail sales grew at the fastest pace in five months and German investor confidence increased more than forecast, boosting growth optimism and fueling speculation the Brazilian central bank may have to moderate the pace of interest-rate cuts to tame inflation.

“The positive external environment can influence futures yields,” Mauricio Nakahodo, senior economist at CM Capital Markets, said by phone from Sao Paulo. “If the rise in commodities continues, that may be reflected in the pace of interest-rate cuts.”

Central bankers led by President Alexandre Tombini stepped up the pace of interest-rate cuts on March 7, cutting the benchmark overnight rate to 9.75 percent, to help spur growth and diminish the allure of the country’s fixed-income assets. Policy makers have lowered the rate 275 basis points since August.

Real Pares Drop

The real pared earlier losses as signs the global economy is strengthening overshadowed speculation Mantega will signal further steps to weaken the currency during his appearance before the Senate today in Brasilia.

“The market respects Mantega now, just like it respects Dilma and the central bank,” said Hideaki Iha, a currency trader at Fair Corretora de Cambio e Valores in Sao Paulo, referring to Brazilian President Dilma Rousseff. “The external market got better and the euro reduced losses.”

Brazil’s main tool for defending itself against an influx of cheap imports is the administration of its currency rate, Mantega said in the Senate today.

While Brazil is committed to a floating rate of exchange, the country is not going to play the “idiot’s role” in the face of other nations devaluing their currencies, Mantega said in testimony before the Senate.

Brazil’s real has been the worst performer among 16 major currencies tracked by Bloomberg this month, losing 4.2 percent after policy makers started stepping up efforts to curb gains. Rousseff pledged last week to take all necessary measures to protect Latin America’s biggest economy from what she dubbed a “monetary tsunami” unleashed by rich nations seeking to devalue their currencies.

Foreign Debt Tax

Brazil yesterday extended a 6 percent tax on foreign loans and bonds issued abroad by local companies to include lending with a duration as long as five years, the third measure taken this month to weaken the real.

The tax, which was originally applied to foreign borrowing of as long as two years, had already been extended on March 1 to loans and bonds with a duration of three years as policy makers seek to damp dollar inflows. The central bank the same day extended the tax to some loans granted to exporters.

Traders are anticipating Tombini will reduce the Selic rate by 50 basis points at the next monetary policy meeting in April and to as low as 8.5 percent by July, according to rate-futures yields.

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

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


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