By Boris Korby and Camila Russo
Brazil is trailing all major Latin American countries in the dollar bond market this year for the first time since 1997 amid concern President-elect Dilma Rousseff will fail to slow spending growth.
The 8.4 percent return on Brazilian bonds this year is the lowest among the eight countries in the region tracked by JPMorgan Chase & Co.’s EMBI+ index. Argentine bonds gained 31 percent, the biggest advance in the region.
Rousseff’s plan to increase cash payments to the poor are helping fuel speculation she will continue the spending policies of President Luiz Inacio Lula da Silva, who boosted government expenditures by 27 percent in the first nine months of the year. The average yield on Brazilian dollar bonds jumped 88 basis points, or 0.88 percentage point, since Oct. 13 to a five-month high of 5.61 percent last week, according to JPMorgan.
“Dilma is untested,” said Michael Roche, an emerging- market strategist at MF Global Holdings Ltd., a New York-based broker. “You have to build a risk premium into the sovereign spread of the country until proven otherwise.”
The central bank raised interest rates this year by 200 basis points to slow inflation as government spending helped spark the fastest economic expansion in more than two decades. Consumer prices increased 5.63 percent in the 12 months through November, the fastest pace since February 2009.
Alexandre Tombini, Rousseff’s pick to head the central bank, will increase borrowing costs to 12.75 percent from 10.75 percent by the end of next year to curb inflation, trading in rates futures shows. Tombini, who has served on the central bank’s board since 2005, was confirmed by the senate last week.
Minimum Wage
Latin America’s biggest economy will grow 7.6 percent this year, according to a Dec. 10 central bank survey of about 100 economists.
Rousseff, who takes office Jan. 1, said last month she’s considering raising the monthly minimum wage to more than 700 reais ($409) by the end of her four-year term from 510 reais. The government’s budget proposal for 2011 increases the minimum wage to 540 reais a month, Worker’s Party Senator Serys Slhessarenko told reporters on Dec. 17 in Brasilia.
“A normal reaction, considering a new government is taking place, is to be concerned about how the new president will conduct the fiscal accounts,” Marcelo Saddi Castro, who oversees 18 billion reais as chief investment officer at SulAmerica Investimentos in Sao Paulo, said in a telephone interview. “The lower the minimum wage, the better the impact on the fiscal accounts.”
Budget Deficit
The budget deficit widened to the equivalent of 3.4 percent of gross domestic product in August, the biggest in five months, before narrowing to 2.4 percent of GDP in September, when the government reaped a revenue windfall from its sale of oil reserves to state-run Petroleo Brasileiro SA.
The Finance Ministry’s press office declined to comment.
Rousseff, who has said social programs and the investment Brazil needs would not be reduced, pledged on TV Record on Nov. 1 to control public spending because “the most important characteristic of a government in today’s world is not to spend what it can’t spend.”
“We’re getting conflicting statements, and her administration hasn’t done much to alleviate concerns over the policies going forward,” Vitali Meschoulam, a strategist at Morgan Stanley in New York, said in a telephone interview. “We still don’t know if they’re going to come out fiscally tighter or looser than the previous administration.”
U.S. Treasuries
Rising U.S. Treasury yields have deepened the slump in Brazilian dollar bonds in the past month, Meschoulam said.
The yield on the 10-year U.S. note touched 3.56 percent last week, the highest level since May 13, on speculation President Barack Obama’s decision to extend tax cuts enacted under his predecessor may bolster U.S. growth while worsening the nation’s budget deficit.
The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries narrowed 2 basis points at 6:29 a.m. New York time to 197, according to JPMorgan.
The cost of protecting Brazilian bonds against default for five years fell 2 basis points to 113, according to CMA prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The real rose 0.2 percent to 1.7108 per U.S. dollar.
Yields on Brazil’s interbank rate futures contract due in January 2012 rose 1 basis point to 11.86 percent.
BNDES
Finance Minister Guido Mantega, who will retain his post under Rousseff, said in November that Brazil plans to cut funding for its state development bank by 50 percent next year in an effort to bring down the world’s second-highest inflation- adjusted interest rates.
BNDES, as the lender is known, will hold an auction of local corporate bonds on Dec. 20 as part of a government plan to boost trading in the secondary market, according to a bank official who asked not to be named in accordance with policy.
The bank will auction bonds issued by Cia. De Bebidas das Americas, Tractebel Energia SA and Cia. Energetica de Minas Gerais, according to three investors who received an e-mail from the bank detailing the plan. The auction will take place between 11 a.m. and 11:30 a.m.
Brazil’s dollar bonds returned 11 percent last year, beating debt from Mexico, as Moody’s Investors Service raised the South American country to an investment-grade rating of Baa3. Brazil won its first investment-grade rating in April 2008, when Standard & Poor’s increased it to BBB-. Fitch Ratings matched the move a month later.
The yield on Brazil’s bonds touched 4.72 percent on Oct. 13, the lowest since JPMorgan began tracking the data in December 1997.
“You have a credit that was very tight and had outperformed in previous years as the good news on fundamentals already got priced in,” Meschoulam said. “So now Brazil has less of a chance of being upgraded than smaller credits in the region, and on a relative basis it looks less attractive.”
Source: Bloomberg
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