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Rousseff Sparks Worst Bond Slump in 13 Months: Brazil Credit
Nov. 12 (Bloomberg) — Brazilian dollar bonds are underperforming emerging-market debt by the biggest margin since October 2009 on speculation President-elect Dilma Rousseff will fail to slow spending growth and curb inflation.
The 1.7 percent loss on Brazilian bonds in the past month is the most since February and compares with an average decline of 0.5 percent for developing-nation debt, according to JPMorgan Chase & Co.’s EMBI+ index. Losses have deepened since Rousseff, 62, won election on Oct. 31, with bonds posting a decline of 1.3 percent over the past two weeks.
Investor concern is mounting about Rousseff’s ability to rein in the budget gap after she said last week that she’ll increase payouts to the poor and may raise the minimum wage more than the 5.5 percent proposed in the government’s 2011 budget bill. Yields on benchmark interest-rate futures soared 23 basis points, or 0.23 percentage point, this month as traders bet spending growth under Rousseff will fuel inflation and prompt the central bank to raise borrowing costs.
“The market is looking for Dilma to come out with a more clear macroeconomic platform,” said Daniel Tenengauzer, head of emerging-markets foreign exchange and rates strategy at Bank of America Corp. in New York. “There’s clearly some degree of concern over the fiscal risk going forward.”
The decline in Brazilian bonds is bigger than the 0.1 percent loss in the past month in U.S. high-yield and investment-grade corporate bonds tracked by Bank of America Merrill Lynch indexes.
Spending Surge
Rousseff, President Luiz Inacio Lula da Silva’s former cabinet chief and handpicked successor, told reporters Nov. 3 that she’s considering raising the monthly minimum wage to more than 700 reais ($406) by 2014 from 510 reais today.
Lula increased spending 27 percent in the first nine months of this year, helping push inflation above the central bank’s 4.5 percent annual target. Consumer prices increased 5.2 percent in the 12 months through October, the fastest pace since May, after rising 4.7 percent through September. The 0.75 percent monthly inflation rate exceeded the 0.67 percent median estimate in a Bloomberg survey of 41 economists.
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.
Rousseff said Nov. 3 that governors were moving to create new sources of funding for health care. The president-elect said she is willing to discuss the issue. The majority of Brazil’s governors support the reintroduction of the tax, O Estado de S.Paulo newspaper said on Nov. 5, citing their own survey.
‘Deterioration’
While Rousseff has pledged to continue Lula’s policies, “the status quo means fiscal deterioration and there’s disappointment that there isn’t a change,” said Vitali Meschoulam, a strategist at Morgan Stanley in New York.
E-mails and phone calls seeking comment from Rousseff’s press department after business hours weren’t returned.
The October inflation report and jump in U.S. Treasury yields to a six-month high are causing the underperformance in Brazilian bonds, according to PineBridge Investments, which has about $78 billion under management.
The “inflation figures came in above market expectations and that has brought some uncertainty to the market,” said Andressa Tezine, the London-based vice president of emerging- market fixed-income at PineBridge Investments. “It’s just down in the short term because of the transition of government.”
Inflation Outlook
Brazilian inflation will quicken to 5.31 percent by year- end, the highest rate since April 2009, according to a central bank survey of economists released Nov. 8. A week earlier, the median forecast was 5.29 percent.
Rousseff named Antonio Palocci, who as finance minister helped cut the inflation rate to 5.3 percent in 2006 from a high of 17.2 percent in 2003, to lead her transition team.
The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries fell 3 basis points to 172 at 6:22 a.m. New York time, according to JPMorgan Chase & Co. The U.S. bond market was closed yesterday for the Veterans’ Day holiday.
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps was unchanged at 101, 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.
The real fell 0.4 percent to 1.7227 per dollar.
‘Too Easy’
Yields on interest-rate futures due in January 2012 were unchanged at 11.57 percent, signaling traders expect the central bank will raise the benchmark rate to about 12.5 percent by then, according to data compiled by Bloomberg.
Policy makers boosted the benchmark rate to 10.75 percent from a record low of 8.75 percent in April to cool the fastest expansion in Latin America’s biggest economy in two decades.
The central bank forecasts the economy will grow 7.3 percent this year after shrinking 0.2 percent in 2009.
“The fiscal policy is too easy for an economy that is growing at this pace,” said Claudia Calich, who helps manage $1.5 billion in emerging-market debt at Invesco Advisers Inc. in New York. “They should be reducing spending.”
To contact the reporters on this story: Tal Barak Harif in New York at tbarak
To contact the editor responsible for this story: David Papadopoulos at papadopoulos
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