* Removal of tax on bonds led to outflows from stocks
* Higher interest rates make bonds more attractive
* Net foreign outflows hit high for the year on June 5
By Asher Levine and Danielle Assalve
SAO PAULO, June 7 Net outflows of foreign funds
from Brazil's Bovespa stock exchange totaled 1.33 billion reais
on Wednesday, the highest figure recorded this year, according
to data released by exchange operator BM&F Bovespa SA
The exit of foreign investors came on the day Brazil's
government removed a 6 percent tax on foreign investment in
local bonds, which led to a 2.26 percent one-day decline in the
benchmark Bovespa index.
Analysts cited a number of reasons for the departure of
foreign funds, including the unwinding of positions meant to get
around the tax, known as IOF.
Previously, many foreign investors effectively avoided the
tax by buying a stock and then building up an opposite short
position in the futures market, allowing the investor to profit
from the interest rate priced into the difference between the
stock price in the spot and the future markets.
"Without the IOF on fixed income, those who traded off the
difference between rates in the spot market and the futures
market - the so-called 'cash and carry' operations - can now go
straight to fixed income," said Luiz Roberto Monteiro, an
analyst with brokerage Renascenca in Sao Paulo.
Brazil's central bank raised its benchmark interest rate by
a half percentage point last week, a move that increased the
attractiveness of Brazilian bonds compared with equities,
"The movement (in stock flows) we're seeing now also has to
do with the expectation for a reduction of bond purchases (by
the Federal Reserve) in the United States and the resulting fall
in liquidity, which emerging markets are going to feel more than
others," said Alvaro Bandeira, a partner with Orama
Investimentos in Rio de Janeiro, Brazil.
With the sharp decline on June 5, net foreign positions in
the Bovespa fell to 6.56 billion reais. Foreign-held short
contracts for the Bovespa index totaled 132,400, equivalent to
nearly 7 billion reais.