Lula May ‘Overshoot’ Bond Plan, Treasury Says: Brazil Credit

Brazil may sell more fixed-rate local bonds than planned this year as the slowest inflation in six months and record-low U.S. and European rates fuel demand for the country’s debt, said Treasury Secretary Arno Augustin.

Fixed-rate local bonds climbed to 545.7 billion reais ($311 billion) in June, or 33.9 percent of total government debt, from 482.1 billion reais, or 32.2 percent, at the end of 2009, according to the Treasury. President Luiz Inacio Lula da Silva’s administration targeted a year-end range of 31 percent to 37 percent for the debt in its annual financing plan, known as PAF in Brazil.

“We’re going to complete the PAF program,” Augustin, 50, said in an interview in Brasilia yesterday. “If anything, we’ll overshoot it. It’s well advanced.”

Yields on benchmark bonds maturing in 2012 declined to an 11-month low of 11.36 percent as traders bet the central bank will stop raising interest rates amid slowing growth in Latin America’s biggest economy. International investors bought a net $1.35 billion of domestic bonds in June, boosting their holdings to $13.4 billion in the first half of the year, the most since 2007, according to data from the central bank’s website.

The Treasury sold 6.7 billion reais of two-year zero-coupon securities, known as LTNs, last week, the biggest auction of a single maturity, at a record-low yield of 11.86 percent.

The government plans to issue today zero-coupon notes due in October and July 2012 and floating-rate bonds, known as LFTs, that mature in 2014 and 2016. It also plans to sell fixed-rate securities due 2014 and 2021. The Treasury is scheduled to announce the size of the auction after 10 a.m. New York time.

Yields Tumble

Yields on the 10 percent bonds maturing in 2012 have tumbled 120 basis points, or 1.2 percentage points, from a 16-month high of 12.56 percent on May 4.

The decline follows a plunge in borrowing costs in developed countries amid concern the global economy is slowing. Two-year U.S. Treasury notes yielded a record low 0.48 percent on Aug. 17, the same day 10-year German bunds reached an unprecedented 2.3 percent.

Brazil “yields are at very low levels and demand remains quite strong,” Paul Biszko, a senior emerging-markets strategist at Royal Bank of Canada in Toronto, said in an telephone interview. “The government is taking advantage of the situation.”

Jobs Report

Central bank President Henrique Meirelles boosted the benchmark rate 200 basis points this year to 10.75 percent to cool an economy that expanded 9 percent in the first quarter, the fastest pace in 15 years. Futures trading shows investors are betting on another 25 basis-point increase at most by year- end to 11 percent as the expansion weakens. On July 8, they expected a year-end rate of 12 percent.

Industrial output fell 1 percent in June from the previous month, while the annual inflation rate, as measured by the government’s IPCA index, slid to 4.6 percent in July, the slowest pace in six months. A report may show today that the economy created 183,472 government-registered jobs last month, the smallest amount since January, according to the median forecast of eight economists surveyed by Bloomberg.

The rally in bonds linked to the consumer price index lagged behind fixed-rate bonds as demand for inflation protection waned. Yields on the securities due in 2012, known as NTN-Bs, declined 73 basis points over the past three months to 5.98 percent.

CPI-Linked Debt

Inflation-linked bonds accounted for 27.7 percent of total government debt in June, up from 26.7 percent at the end of 2009, according to the Treasury. The government set a year-end range of 24 percent to 28 percent for the securities.

The yield on the interest-rate futures contract maturing in January fell one basis point yesterday to 10.73 percent, extending its decline since June 30 to 63 basis points.

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries narrowed two basis points to 197 yesterday, according to JPMorgan Chase & Co.

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps rose one basis point yesterday to 117, 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.

‘Good Moment’

The real climbed 0.1 percent to 1.7531 per dollar yesterday, extending its advance this quarter to 2.9 percent.

Brazil may sell real-denominated or dollar-denominated bonds in overseas markets in coming months and is seeking to increase debt sales in Asia, Augustin said in the interview.

The government has used the decline in yields to build up a cash position big enough to cover six months of budget payments, Augustin said. While Brazil could keep cash holdings at closer to the equivalent of three months, the Treasury took advantage of the “good moment in the market” to increase its position, he said.

The global “crisis showed that the cash cushion is necessary,” Augustin said.