Bernanke Paves Way for Lula Bond Sale as Brazil Yields Sink
U.S. Federal Reserve Chairman Ben S. Bernanke speaks during a conference on the Squam Lake Report in New York. Photographer: Ramin Talaie/Bloomberg
Federal Reserve Chairman Ben S. Bernanke’s drive to keep interest rates near zero may pave the way for Brazilian President Luiz Inacio Lula da Silva to sell international bonds for the first time since April.
Brazil’s benchmark dollar borrowing costs have fallen this month the most since February as Bernanke pledged last week to keep the benchmark U.S. rate at a record low for an “extended period” to support the economic recovery. With yields near a seven-month low, Brazil may sell more of its dollar bonds due in 2021 and 2041 at “any time,” according to Kieran Curtis, who helps manage $2 billion at Aviva Investors in London.
“It would be a smart move for the Brazilian government to issue longer-dated debt with yields at these low levels,” Laura Ostrander, who oversees $3 billion assets at Columbia Management Group LLC. in Boston, said in a telephone interview. “The Fed is telling you they will maintain low rates for some time. I don’t think there’s a huge risk owning Brazilian dollar bonds. Even though the yields are low, you still get more than on Treasuries.”
Brazil, rated BBB- at Standard & Poor’s and Baa3 at Moody’s Investors Service, both the lowest investment grade, sold $788 million of bonds due in 2021 to yield 5 percent in its last sale abroad on April 15.
The yield has dropped 13 basis points since then to 4.88 percent as Bernanke’s comments helped spark a rally in U.S. Treasuries, the benchmark for emerging-market dollar bonds. The average yield on Brazilian dollar debt touched a seven-month low of 5.68 percent on June 18, according to JPMorgan Chase & Co.’s EMBI+ index. The yield was 5.72 percent on June 25.
Treasury Monitoring
The government will sell more of its dollar bonds due in 2021 and 2041 this year if market conditions remain favorable, Deputy Treasury Secretary Paulo Valle told reporters in New York on June 22. JPMorgan estimates that Brazil will issue $1.2 billion more bonds in international markets this year.
“Prices on Brazilian bonds have been improving in recent weeks,” Fernando Garrido, the Treasury’s debt operations coordinator, said in a June 25 telephone interview from Brasilia. “The Treasury permanently monitors the secondary market to choose the best moment to sell bonds.”
Brazilian dollar debt has returned 1.6 percent since May 31, the biggest monthly advance since February, according to JPMorgan. The bonds have gained 5.1 percent this year, beating the average 4.9 percent return on emerging-market dollar debt.
A government offering could help reignite bond sales from Brazilian companies, Garrido said. There have been no Brazilian corporate debt offerings in international markets since Braskem SA, Latin America’s biggest petrochemical producer, issued $400 million of 10-year securities on April 30 as Europe’s debt crisis eroded demand for emerging-market debt.
Corporate Yields
The average yield on Brazilian corporate dollar bonds jumped to a 2 1/2-month high of 6.79 percent on May 7 before sliding back to 6.44 percent at the end of last week as concern eased that the European crisis will erode global economic growth, according to JPMorgan’s CEMBI index.
“The sovereign is the benchmark for private issuers,” Garrido said. “It’s common for the sale of sovereign bonds to lead the way for bonds from companies.”
The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. securities widened one basis point today to 239, according to JPMorgan.
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps rose four basis points last week to 131, according to data compiled by CMA DataVision. 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.
Real Declines
The real gained 0.1 percent today to 1.7783 per dollar, adding its advance this month to 2.4 percent. The yield on Brazil’s overnight interest-rate futures contract due in January held at 11.31 percent. That yield shows traders expect the central bank to raise the rate to about 12 percent by year-end from 10.25 percent today to cool the economy after growth surged to its fastest pace in 15 years in the first quarter.
Yields on 10-year U.S. Treasuries dropped to a 13-month low of 3.11 percent last week as back-to-back months of falling consumer prices and the European crisis bolstered speculation Bernanke will leave the benchmark rate near zero until 2011. The yield has dropped 88 basis points since April 5, helping push rates on Brazilian bonds due in 2041 down 33 basis points to 5.75 percent on June 18, the lowest since they were issued in September.
ECB, BOJ
“With rates in the U.S., Europe and Japan staying low for longer, people are still going to look for yield pickup in safe credits,” said Denise Simon, who helps manage $6.5 billion of emerging-market assets at HSBC Halbis Partners in New York. “There’s demand for Brazilian paper. There’s more bang for your buck.”
The Fed has kept its benchmark rate in a range of zero to 0.25 percent since December 2008. The European Central Bank’s benchmark interest rate is 1 percent while the Bank of Japan’s is 0.1 percent.
Brazil may try to sell more bonds before presidential elections in October, according to Aviva’s Curtis. Separately, Fitch Ratings today revised Brazil’s rating outlook to positive from stable and affirmed the country’s BBB- rating, citing the country’s “economic performance in the face of the global recession.”
More Issuance?
“It’s reasonable to suggest that they will try new issuance before elections,” Curtis said. “It’s arrogant to assume there won’t be any volatility during the election.”
Dilma Roussef, Lula’s former cabinet chief and chosen successor, leads opinion polls along withJose Serra, a former governor of Sao Paulo state.
Brazil has reduced its dollar borrowing this decade, helped by a rally in its commodity exports that has boosted its foreign reserves to a record $253 billion from $38 billion when Lula took office in 2003. The country, which became a net creditor for the first time in 2008, had less than $60 billion of dollar debt as of April, down from about $75 billion in 2001, according to the Treasury.
“A little bit of new issuance coming to the market will be relatively easily absorbed,” saidVivienne Taberer, who oversees $2.5 billion in emerging-market assets at Investec Asset Management in Cape Town, South Africa. She has an “overweight” position in Brazilian bonds. “Brazil probably offers a little bit of value,” she said.
No comments:
Post a Comment