Bloomberg News

Brazil Rate Futures Yields Fall to Record on Europe Debt Turmoil

June 26, 2012

Yields on Brazilian interest-rate futures contracts fell to a record low on concern growth in Latin America’s largest economy will stall as European leaders struggle to contain sovereign-debt turmoil.

The real declined and futures yields dropped after Spain’s and Italy’s borrowing costs rose at debt auctions today and Moody’s Investors Service lowered its ratings on 28 Spanish banks yesterday. The real briefly pared losses after the central bank announced it would offer 60,000 currency swap contracts tomorrow. Analysts covering Brazil cut their 2012 expansion outlook for a seventh consecutive week yesterday.

“Investors remain skeptical about a solution to the European crisis this week,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA, said by phone from Sao Paulo. “With the expectation of less global growth, there’s also a trend of less growth in Brazil.”

Yields on the futures contract due in January fell one basis point, or 0.01 percentage point, to 7.65 percent after earlier touching a record low 7.61 percent. It has tumbled 126 basis points this quarter. The real slid 0.7 percent to 2.0762 per U.S. dollar.

Brazil’s central bank will offer as many as 60,000 currency swap contracts at an auction tomorrow from 11:15 a.m. to 11:30 a.m. local time, according to a statement distributed by the bank. The auction will roll over as much as $2.93 billion worth of swaps that expire on July 2, according to data on the bank’s website.

External Environment

“It’s just a rollover of swaps, which doesn’t have the same impact as a new operation,” Italo Abucater, the head of currency trading at Icap do Brasil DTVM, said by phone from Sao Paulo. “The external environment is still one of risk aversion. There’s not an expectation of improvement abroad.”

Brazil’s currency has lost 12 percent this quarter, the worst performance among 25 emerging-market currencies tracked by Bloomberg, as the European debt crisis sapped demand for Brazilian assets and compounded government efforts to weaken the currency and boost exports.

Policy makers bought $7.2 billion in the spot market in April, the most since purchases of $8.4 billion in March 2011. They reversed the policy in May to stem the real’s decline by auctioning swaps as Europe’s debt crisis deepened and China, Brazil’s biggest trading partner, showed signs of a slowdown.

Central bank President Alexandre Tombini has lowered Brazil’s target lending rate by four percentage points since Aug. 31 to 8.5 percent.

Brazilian outstanding bank lending rose 1.7 percent in May to 2.1 trillion reais ($1 trillion), the central bank said today.

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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