Brazilian Finance Minister Guido Mantega’s bid to stem gains in the real is hurting him in the bond market.
The yield on Brazil’s 10 percent securities due in 2021 surged 29 basis points this week, the biggest jump in four months, after Mantega said he may raise taxes on foreigners’ fixed-income investments to limit the supply of dollars in the currency market, according to data compiled by Bloomberg.
Mantega is seeking to keep out foreign investors whose asset purchases helped spark a 37 percent surge in the real against the dollar since the end of 2008, the second-biggest gain in emerging markets after the South-African rand. The central bank bought $9.4 billion from Sept. 1 through Sept. 24 in the foreign-exchange market, the most over such a period since the end of 2008, as part of an effort by policy makers from Japan to Colombia to slow the appreciation of their currencies.
“Foreign investors are not going to accept it passively, and they are the most active in the longer end of the curve,” said Silvio Campos Neto, chief economist at Banco Schahin SA. “That would mean a rising cost on public debt.”
Yields on Brazil’s overnight rate futures contract due in 2021 climbed 27 basis points, or 0.27 percentage point, this week to 11.68 percent, the biggest weekly increase since May.
Foreigners held a record $89 billion of Brazilian local bonds as of August, equal to 10.1 percent of the debt, according to the central bank. Five years earlier, they held 0.8 percent.
‘Inappropriate Way’
Mantega, 61, said Sept. 27 that the government is considering implementing a tax on short-term, fixed-income investments as other countries engage in a “currency war” to weaken their exchange rates and bolster exports. Brazil implemented a 2 percent tax in October 2009 on foreign investment in the stock and bond markets.
The government will increase that tax after an Oct. 3 vote to elect a successor to President Luiz Inacio Lula da Silva, according to a Sept. 28 column by IG news services. Dilma Rousseff, Lula’s former cabinet chief, leads opinion polls ahead of the vote.
Mantega said that day that the government doesn’t plan to increase the tax, known as the IOF, “at this time.”
“There is no plan to change the IOF,” Mantega told reporters in Brasilia. “Of course all possibilities are open, but only if the currency behaves in an inappropriate way.”
Rate Gap
The yield on the government’s 10 percent securities due in 2021 climbed 37 basis points in September to 11.89 percent, according to data compiled by Bloomberg. Yields on rate futures contracts are up 38 to 11.65 percent during the same period. They jumped 35 basis points to 13.19 percent in the two weeks following the announcement of the tax in October 2009, according to data compiled by Bloomberg.
“They keep shooting themselves in the foot,” said Pablo Cisilino, who helps manage $14 billion in emerging-market debt at Stone Harbor Investment Partners in New York. “Every time they increase the IOF tax, the curve steepens and we have to withstand some volatility.”
Brazil’s 10.75 percent benchmark interest rate, which is 900 basis points higher than the key rates in the U.S. and euro zone, will preserve the allure of the country’s fixed-income assets, said Warren Hyland, the head of emerging-market credit fund management at Schroder Investment Management Ltd.,
Brazil won’t have a “huge problem to borrow money from international investors,” Hyland, who helps oversee $255 billion in assets at Schroder, said in a phone interview from London. “It’s a very liquid market.”
Inflation Forecast
Brazil’s current-account deficit, which reached a record $45.8 billion in the 12 months ending August, will widen to $60 billion in 2011, the central bank forecast Sept. 21, as rising domestic demand and the real’s rally boost spending on imports and overseas travel.
Yields on Brazil’s interbank rate futures contract due in January 2012, the most traded in Sao Paulo’s BM&F Exchange, fell six basis points to 11.44 percent by 5 p.m. in New York. Policy makers reduced their main 2011 inflation forecast to 4.6 percent from 5 percent in June, according to the central bank’s quarterly inflation report released yesterday. The central bank targets annual inflation of 4.5 percent.
The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries fell five basis points to 202, according to JPMorgan Chase & Co. indexes.
‘No Sense’
The cost of protecting Brazilian bonds against default for five years fell 2 basis points to 113 basis points, according to CMA DataVision 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 weakened 0.1 percent to 1.6897.
The central bank has purchased dollars every day since May 7, 2009, swelling its foreign reserves to a record $275 billion, to slow the currency’s advance.
Colombia’s central bank said Sept. 15 it plans to buy a minimum of $20 million daily for at least four months to stem the peso’s 13.4 percent surge this year. Japan sold 2.12 trillion yen ($25 billion) in the month through Sept. 28, according to the Ministry of Finance. The yen rose to a 15-year high against the dollar on Sept. 15, prompting the Japanese government to intervene in the foreign-exchange market for the first time since 2004.
Brazilian central bank President Henrique Meirelles said Sept. 28 the government is considering higher taxes on foreign investment as other countries adopt policies to weaken their currencies. Yields on rate futures contracts due in 2021 climbed 11 basis points that day.
The central bank said in an e-mailed response to questions yesterday that it doesn’t comment on market moves.
“Increasing the inflow tax makes no sense to Brazil,” said Jose Francisco de Lima Goncalves, the chief economist at Banco Fator SA. “Why would you do it if it will raise public debt?”
To contact the reporters on this story: Tal Barak Harif in New York at tbarak@bloomberg.net; Tatiana Bautzer in Sao Paulo at tbautzer@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
http://jodnet.blogspot.com
The yield on Brazil’s 10 percent securities due in 2021 surged 29 basis points this week, the biggest jump in four months, after Mantega said he may raise taxes on foreigners’ fixed-income investments to limit the supply of dollars in the currency market, according to data compiled by Bloomberg.
Mantega is seeking to keep out foreign investors whose asset purchases helped spark a 37 percent surge in the real against the dollar since the end of 2008, the second-biggest gain in emerging markets after the South-African rand. The central bank bought $9.4 billion from Sept. 1 through Sept. 24 in the foreign-exchange market, the most over such a period since the end of 2008, as part of an effort by policy makers from Japan to Colombia to slow the appreciation of their currencies.
“Foreign investors are not going to accept it passively, and they are the most active in the longer end of the curve,” said Silvio Campos Neto, chief economist at Banco Schahin SA. “That would mean a rising cost on public debt.”
Yields on Brazil’s overnight rate futures contract due in 2021 climbed 27 basis points, or 0.27 percentage point, this week to 11.68 percent, the biggest weekly increase since May.
Foreigners held a record $89 billion of Brazilian local bonds as of August, equal to 10.1 percent of the debt, according to the central bank. Five years earlier, they held 0.8 percent.
‘Inappropriate Way’
Mantega, 61, said Sept. 27 that the government is considering implementing a tax on short-term, fixed-income investments as other countries engage in a “currency war” to weaken their exchange rates and bolster exports. Brazil implemented a 2 percent tax in October 2009 on foreign investment in the stock and bond markets.
The government will increase that tax after an Oct. 3 vote to elect a successor to President Luiz Inacio Lula da Silva, according to a Sept. 28 column by IG news services. Dilma Rousseff, Lula’s former cabinet chief, leads opinion polls ahead of the vote.
Mantega said that day that the government doesn’t plan to increase the tax, known as the IOF, “at this time.”
“There is no plan to change the IOF,” Mantega told reporters in Brasilia. “Of course all possibilities are open, but only if the currency behaves in an inappropriate way.”
Rate Gap
The yield on the government’s 10 percent securities due in 2021 climbed 37 basis points in September to 11.89 percent, according to data compiled by Bloomberg. Yields on rate futures contracts are up 38 to 11.65 percent during the same period. They jumped 35 basis points to 13.19 percent in the two weeks following the announcement of the tax in October 2009, according to data compiled by Bloomberg.
“They keep shooting themselves in the foot,” said Pablo Cisilino, who helps manage $14 billion in emerging-market debt at Stone Harbor Investment Partners in New York. “Every time they increase the IOF tax, the curve steepens and we have to withstand some volatility.”
Brazil’s 10.75 percent benchmark interest rate, which is 900 basis points higher than the key rates in the U.S. and euro zone, will preserve the allure of the country’s fixed-income assets, said Warren Hyland, the head of emerging-market credit fund management at Schroder Investment Management Ltd.,
Brazil won’t have a “huge problem to borrow money from international investors,” Hyland, who helps oversee $255 billion in assets at Schroder, said in a phone interview from London. “It’s a very liquid market.”
Inflation Forecast
Brazil’s current-account deficit, which reached a record $45.8 billion in the 12 months ending August, will widen to $60 billion in 2011, the central bank forecast Sept. 21, as rising domestic demand and the real’s rally boost spending on imports and overseas travel.
Yields on Brazil’s interbank rate futures contract due in January 2012, the most traded in Sao Paulo’s BM&F Exchange, fell six basis points to 11.44 percent by 5 p.m. in New York. Policy makers reduced their main 2011 inflation forecast to 4.6 percent from 5 percent in June, according to the central bank’s quarterly inflation report released yesterday. The central bank targets annual inflation of 4.5 percent.
The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries fell five basis points to 202, according to JPMorgan Chase & Co. indexes.
‘No Sense’
The cost of protecting Brazilian bonds against default for five years fell 2 basis points to 113 basis points, according to CMA DataVision 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 weakened 0.1 percent to 1.6897.
The central bank has purchased dollars every day since May 7, 2009, swelling its foreign reserves to a record $275 billion, to slow the currency’s advance.
Colombia’s central bank said Sept. 15 it plans to buy a minimum of $20 million daily for at least four months to stem the peso’s 13.4 percent surge this year. Japan sold 2.12 trillion yen ($25 billion) in the month through Sept. 28, according to the Ministry of Finance. The yen rose to a 15-year high against the dollar on Sept. 15, prompting the Japanese government to intervene in the foreign-exchange market for the first time since 2004.
Brazilian central bank President Henrique Meirelles said Sept. 28 the government is considering higher taxes on foreign investment as other countries adopt policies to weaken their currencies. Yields on rate futures contracts due in 2021 climbed 11 basis points that day.
The central bank said in an e-mailed response to questions yesterday that it doesn’t comment on market moves.
“Increasing the inflow tax makes no sense to Brazil,” said Jose Francisco de Lima Goncalves, the chief economist at Banco Fator SA. “Why would you do it if it will raise public debt?”
To contact the reporters on this story: Tal Barak Harif in New York at tbarak@bloomberg.net; Tatiana Bautzer in Sao Paulo at tbautzer@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
http://jodnet.blogspot.com
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