Brazil Interest-Rate Futures Yields Plunge on Mantega Policy

Yields on Brazil’s longer-term interest-rate futures posted the biggest decline this month after Finance Minister Guido Mantega said he will seek to cut spending to allow inflation and borrowing costs to drop.

The yield on the contract due January 2017 plunged 18 basis points, or 0.18 percentage point, to 12.11 percent at 3 p.m. New York time, the biggest one-day slide since Oct. 29.

President-elect Dilma Rousseff said today she will keep Mantega in his post and nominated Alexandre Tombini as central bank president, while vowing to keep the policies that helped her predecessor cut inflation by two-thirds. Tombini, who served as a board member since 2005, said today that Rousseff guaranteed the bank’s autonomy.

“These are strong declarations; it appears the government is moving toward the central bank in inflation control,” said Luciano Rostagno, the chief strategist at CM Capital Markets, the third-biggest currency trader on the Sao Paulo exchange. “A fiscal adjustment could take the weight off of monetary policy.”

Mantega, speaking to reporters in Brasilia today, said the government will “make an effort” to reduce public spending next year. Brazil won’t create new expenditures next year, he said.

The yield on the contract maturing in July 2011 jumped 9 basis points to 11.39 percent on speculation Tombini will act early to contain consumer prices.

‘Necessary Adjustments’

“The market thinks Dilma’s government will start doing the necessary adjustments to contain inflation with some raising of interest rates, some increase in reserve requirements and some fiscal tightening,” Eduardo Galasini, head of proprietary trading at Banco Banif Primus, said in a phone interview from Sao Paulo. “With this, inflation in the long term tends to be smaller, making interest rates fall in the long curve.”

Tombini will replace Henrique Meirelles, Brazil’s longest- serving central bank president.

“Tombini has a good reputation within the market,” Flavia Cattan-Naslausky, a currency strategist at RBS Greenwich Capital Markets in Stamford, Connecticut, said in a phone interview. “He’s someone that’s committed to inflation targeting.”

The real strengthened 0.8 percent to 1.7216 per dollar, from 1.7357 yesterday.