Brazilian Bond Yields Fall After Biggest Rate Cut Since 2003

By Adriana Brasileiro
Jan. 22 (Bloomberg) -- Brazil’s local-currency bond yields dropped to the lowest since October 2007 after the central bank unexpectedly cut its benchmark interest rate by the most in five years to boost economic growth.
“The central bank chose to shock the market, to make it change its gloomy expectations about growth right now,” said Luiz Adriano Martinez, a portfolio manager who helps oversee 55 billion reais ($23.7 billion) at Unibanco Asset Management in Sao Paulo.
The yield on Brazil’s January 2010 zero-coupon, local- currency bond fell seven basis points, or 0.07 percentage point, to 11.20 percent at 2:03 p.m. New York time, after most trading in Brazil had ended. That’s the lowest since Oct. 9, 2007, when the bond first started trading. The yield plunged 102 basis points since the start of the year as speculation mounted that the central bank would slash its benchmark rate amid slowing growth and signs of deflation.
The yield on Brazil’s overnight futures contract for July delivery retreated 23 basis points to 11.69 percent, the lowest since Nov. 6, 2007.
Brazilian central bankers yesterday voted 5-3 to lower the overnight rate to 12.75 percent from a two-year high of 13.75 percent, surprising 41 of 49 economists who had predicted a smaller cut. The bank said it was “carrying out immediately a significant part” of a new easing cycle.
Stalling Economy
The cut comes after recent data showing Brazil’s economy is stalling as local demand slumps. The $1.3 trillion economy probably started to shrink, according to banks including Banco BNP Paribas Brasil SA, JPMorgan Chase & Co. and Morgan Stanley.
“There were many technical reasons to justify a more aggressive move now to prioritize growth,” said Alessandra Ribeiro, an economist at Tendencias Consultoria in Sao Paulo who predicted the 100-basis-point reduction.
Analysts such as Marcelo Carvalho, Morgan Stanley’s chief economist for Brazil, and Alexandre Lintz, chief Latin America economist at BNP Paribas, said they expect no growth this year after industrial production in November plunged by the most in seven years, dropping 6.2 percent from the year-ago month, according to a Jan. 6 government report.
Retail sales, including vehicles and construction materials, fell 4.1 percent in November, the first annual decline in the index since it began in January 2003, the statistics agency IBGE said on Jan. 16.
Brazil’s real rose 0.5 percent to 2.3263 per U.S. dollar. The currency fell as much as 1 percent to 2.36 today after Microsoft Corp. said it would cut about 5 percent of its workforce amid slumping demand. U.S. stocks retreated on disappointing corporate earnings and economic data that signaled the recession is deepening.
Central Bank
The central bank drew on its international reserves today to buy reais in the currency market in an effort to prop up the real. It has plunged 33 percent since reaching a nine-year high of 1.5545 per dollar on Aug. 1 and is the worst performer since then among the 16 most-actively traded currencies tracked by Bloomberg.
International reserves fell $345 million on Jan. 21 to $203.10 billion from $203.44 billion on Jan. 20, the central bank said in a report released today on its Web site.
Brazil’s central bank also placed 33,800 currency swaps at an auction today, out of 36,000 contracts offered, to add liquidity to the market.
The swap offers are part of government efforts to ease the effect of the credit crunch in local markets.
The Treasury will provide state-run development bank BNDES with 100 billion reais to lend to credit-starved companies such as Petroleo Brasileiro SA, Finance Minister Guido Mantega said today.