Brazil's interest-rate futures jump on inflation fears

Tue Aug 5, 2014 12:07pm EDT

By Walter Brandimarte
    RIO DE JANEIRO, Aug 5 (Reuters) - Yields paid on Brazil's
interest-rate futures contracts, particularly the longest-dated
ones, rose sharply on Tuesday as a weakening real fueled
inflation fears, as did estimates that electricity costs will
jump higher than expected in 2015.
    Concern about the government's ability to meet its fiscal
savings target for 2014 also weighed on market sentiment,
boosting rates.  
    Interest rates futures for January 2016 climbed 22
basis points to 11.53 percent while those for January 2017
 rose 23 basis points to 11.82 percent.
    "The fear is that administered price increase would be
greater than expected and this is putting pressure" on the yield
curve, Kenneth Lam, a Citi strategist for Latin American local
markets, wrote in a note to clients.
    Power utility bills are forecast to rise sharply in 2015 to
make up for the intensive use of more expensive thermoelectric
plants in 2014, when a severe draught reduced hydroelectric
generation. An expected increase in domestic fuel prices will
also boost inflation, which currently stands at the ceiling of a
government target.
    Recent losses in the real, which has weakened nearly
4 percent in little more than a month, also contributed to
inflation fears as it increases prices of imported goods.    
    The yield curve now prices in bets that Brazil's benchmark
Selic rate will rise 1 percentage point during 2015, from the
current level of 11 percent to 12 percent. On Monday, bets were
that the Selic would rise by 0.75 percentage points in 2015.
    Yields paid on shorter-dated contracts also rose despite
expectations that the central bank will leave the Selic stable
at 11 percent until at least the end of the year. Contracts
maturing in January 2015 rose 6 basis points to 10.88
percent.
    "After focusing on the weak economic activity for weeks, the
market is again worried about inflation and Brazil's fiscal
performance," said Jayro Rezende, a manager at the derivatives
desk of CGD Securities in Brazil.
    Concern about Brazil's ability to meet its 2014 fiscal
target increased after the country's federal audit court
suspended the publication of rules for an auction of
fourth-generation (4G) broadcast spectrum, which is expected to
bring 8 billion reais ($3.5 billion) to government coffers. 
    Last week, Brazil's Treasury Secretary Arno Augustin said
the government was counting on that money to meet its 2014
fiscal target.
    
    Most traded interest-rate contracts at 1245 GMT:
    
 month   ticker     last(pc     previous     change(p.p.
                      t)       close(pct)         )
  OCT4               10.82        10.8          0.02
  NOV4               10.83       10.81          0.02
  JAN5               10.88       10.82          0.06
  JAN6               11.53       11.31          0.22
  JAN7               11.81       11.59          0.22
  JAN1               12.05       11.87          0.18
 
 (Additional reporting by Bruno Federowski in São Paulo; Editing
by David Gregorio)
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