Brazilian President Dilma Rousseff is winning back bond investors in her first week in office by stepping up pledges to contain spending and inflation.
Yields on benchmark real-denominated bonds due in 2021 tumbled 64 basis points, or 0.64 percentage point, to 12.13 percent since Nov. 22 as Rousseff rejected union demands for a bigger-than-planned minimum wage increase and her finance minister said the government is planning budget cuts. The drop compares with a 66 basis-point jump in U.S. 10-year yields and a 38 basis-point increase in Mexico?s.
Brazil?s debt rally is lowering borrowing costs just as the government prepares to auction 50 billion reais ($30 billion) of notes this month, the most since at least 2001, to help repay maturing obligations. The gains in Brazilian bonds reversed a slump after Rousseff?s election that caused yields to advance 86 basis points from the Oct. 31 ballot through Nov. 22.
?The decline in yields is a sign that that the market has for the most part given Dilma a passing grade in terms of her immediate policy management,? Aryam Vazquez, an economist with Wells Fargo & Co. in New York, said in a telephone interview. ?If the auction goes well, as expected, it will provide an added boost of confidence.?
Brazil is scheduled to hold tomorrow its first auction this year. The Treasury plans to sell fixed-rate securities due in October and in 2013 and 2015 as well as debt linked to the country?s 10.75 percent benchmark overnight rate maturing in 2015 and 2017. Yields on the 2015 notes have dropped 40 basis points since Nov. 22 after rising 75 basis points in the previous three weeks.
Boost Payouts
This month?s 50 billion real sale program is double the 25 billion real plan in December, when the auction calendar was cut back because of the year-end holidays, and up from 45 billion reais in January 2010.
Rousseff, who served as cabinet chief under her predecessor Luiz Inacio Lula da Silva, sparked an initial bond rout after her election in part by saying Nov. 3 that she?d boost payouts to the poor and consider raising the minimum wage more than planned.
Rousseff reversed course last month, giving her support for a bill passed by lawmakers that provides for a 5.9 percent wage increase, less than the 14 percent that unions were seeking. That move was the first ?concrete? sign from Rousseff that she was willing to contain spending, said Tony Volpon, a Latin America strategist at Nomura Securities in New York.
?Early after the campaign I remember her coming out and saying that we can maintain an expansive fiscal stance,? Vasquez said. ?She was forced to revert because the markets really did not accept? those comments, he said.
Economic Expansion
The budget deficit widened to the equivalent of 2.7 percent of gross domestic product in November from 2.5 percent in October, according to the central bank. The deficit has shrunk from 4.5 percent in October 2009 as the fastest economic expansion in two decades bolstered tax revenue.
Rousseff, 63, kept Lula?s finance minister, Guido Mantega, in his post, promoted central bank director Alexandre Tombini to bank president and pledged to protect Brazil from the ?plague? of inflation in her Jan. 1 inaugural speech. On Jan. 3, Tombini said the country should seek to lower its 4.5 percent annual inflation target. Mantega said the next day that the government will implement ?considerable? spending cuts this year.
?Dilma appointed some very credible members of her economic team,? said Jim Craige, who helps manage about $20 billion of emerging-market assets at Stone Harbor Investment Partners in New York, including Brazilian local debt. ?That certainly helped.?
Long-term Yields
Craige said he expects long-term yields to drop further as investors realize the government is being ?aggressive on inflation.? Consumer prices rose 5.6 percent in the 12 months through November, the fastest pace since February 2009, as food prices jumped. The annual inflation rate is down from a high of 17 percent in Lula?s first year in office in 2003.
The Treasury didn?t respond to Bloomberg e-mail and phone calls asking for comments.
Yields on Brazil?s interbank rate futures contract due in January 2012 rose 7 basis points to 12.09 percent yesterday, indicating traders expect policy makers will increase the benchmark rate by about 200 basis points by the end of this year to curb inflation. The bank boosted the overnight rate 200 basis points last year from a record low 8.75 percent.
The central bank said in the minutes of its Dec. 7-8 policy meeting that vigilance is needed to prevent short-term price jumps from impacting future inflation. On Dec. 3, the central bank raised reserve requirements on cash and time deposits.
?Hawkish Talk?
That ?relatively hawkish talk? from the central bank has also helped drive down yields, said Edwin Gutierrez, who helps manage $6 billion in emerging-market debt, including Brazilian local bonds, at Aberdeen Management Plc in London.
Yields on interest-rate futures contracts due in January 2021 increased 5 basis points yesterday to 11.84 percent. The yields have dropped 57 basis points since Nov. 22.
The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries narrowed 3 basis points to 164 yesterday, according to JPMorgan.
The cost of protecting Brazilian bonds against default for five years increased 1 basis point yesterday to 105, 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 declined 0.8 percent to 1.6739 per U.S. dollar yesterday.
?Big Auctions?
While the bond market has rebounded, there?s still concern that the Rousseff administration won?t do enough to cut spending, said Vivienne Taberer, who helps manage $5 billion in emerging-market debt including Brazilian local bonds at Investec Asset Management in Cape Town.
?The market is still playing with the idea of whether there is really going to be the kind of fiscal consolidation that?s needed or not,? Taberer said by phone from London. ?Lots of big auctions are going to make the market feel a little bit uncomfortable.?
Nomura?s Volpon said he?s waiting for a ?clearer definition? of Rousseff?s fiscal policy.
?But so far the signs are good,? he said.
To contact the reporters on this story: Arnaldo Galvao in Brasilia at agalvao1@bloomberg.net; Ben Bain in New York at bbain2@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
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