March 25, 2010 / 11:32 PM / 9 years ago

Brazil yields up on interest rate hike bets

(Updates to close)

SAO PAULO, March 25 (Reuters) - Yields on Brazilian interest rate future contracts <0#DIJ:> for shorter maturities jumped on Thursday over expectations the central bank would hike borrowing costs in April for the first time in two years.

Brazil’s currency and benchmark stock index fell, however, weighed down by debt problems in Europe and a 2 percent drop in Brazil’s state-run oil company Petrobras (PETR4.SA)(PBR.N).

Brazilian future contracts maturing between June 2010 and Jan. 2011 saw yields jump on published minutes from Brazil’s last central bank rate meeting which showed policymakers ready to hike borrowing costs. [ID:nN25217888].

Yields for longer tenors fell, indicating prompt monetary action may not require additional increases beyond 2012.

“These strong and clear signals that the central bank intends to be vigilant and work to avoid being behind-the-curve on rates and inflation should bolster a flattening bias on the rate curve” for long tenors, Nick Chamie, head of emerging markets research at RBC in Toronto, said in a note to clients.

The yield on the Jan. 2011 DIJF1 interest rate futures contract, the most widely traded in Sao Paulo, jumped 5 basis points to 10.38 percent on Thursday from its 10.32 percent close the previous day.

The yield on the contract due June 2010 DIJM0 advanced to point to 8.93 percent. In the meantime, the yield on the July 2012 tenor DIJN2 fell to 11.99 percent.

The central bank last week decided to wait for further signs of inflation before boosting rates. Three of the board’s eight members voted for half-a-percentage-point increase in the Selic rate BRCBMP=ECI from the current 8.75 percent.

Investors use the rate contracts, known as DIs in Brazil, as a gauge of the level of the Selic at the end of each maturity.

“It must be noted that there was also consensus among members of the committee for the need to adapt the pace of adjustments in the benchmark interest rate to the trend in prospective inflation,” to limit current inflation pressures from becoming more permanent, the minutes said.

While most analysts expect the bank to start a tightening cycle on April 28 and push for an increase of between 200 and 300 basis points through mid-2011, some investors are pricing about 450 basis points of hikes in the same period.

REAL SLIDES, STOCKS DOWN

The real BRBY, Brazil’s currency, slipped 0.44 percent to 1.810 reais per dollar. Concern over Greece’s debt problems overcame optimism at Wednesday’s move by Brazil’s central bank to simplify foreign exchange market rules to lower transaction costs.

The measures allow companies to keep foreign exchange proceeds outside of the country for longer and give the National Treasury more flexibility to act in the currency market.

The benchmark Bovespa stock index .BVSP dropped 0.68 percent to 68,441.66 as markets feared a joint euro zone-International Monetary Fund safety net for Greece showed the currency bloc was unable to handle debt problems alone. [nLDE62N2R1]

Petrobras shares fell after Brazil’s securities regulator rejected a proposal by a company director to settle a dispute over the company’s failure to make a regulatory filing about an offshore oil discovery.

Shares of Brasil Telecom BRTO4.SA tumbled 5.46 percent — the biggest drop in more than two months — after parent company Oi cut the number of shares offered to minority investors in a swap crucial to the companies’ planned merger.

Mining giant Vale VALE5.SA, the world’s largest iron ore producer, fell 1.69 percent to 30.79 reais amid a broader global commodities slide.

Reporting by Guillermo Parra-Bernal, writing by Brian Ellsworth; Editing by Andrew Hay

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