Rousseff Losing Traders’ Confidence, Rates Show: Brazil Credit

Dilma Rousseff has deepened bond traders’ inflation concerns in her first eight days as president-elect of Brazil, futures trading shows.

The yield difference between interest-rate futures due in January 2011 and 2015 has jumped to a five-month high of 123 basis points, a sign investors anticipate the central bank will have to raise borrowing costs during her first term to curb quickening inflation. The gap widened 24 basis points, or 0.24 percentage point, since Oct. 29, the last trading day before elections.

Speculation is building that Rousseff, 62, will fail to cut government expenses, hurting the central bank’s effort to bring inflation down to its 4.5 percent annual target. Rousseff said she’ll boost payouts to the poor and may raise the minimum wage more than planned on Nov. 3, three days after stating in her victory speech that Brazilians don’t tolerate governments that spend at “unsustainable levels.”

“What has been clear is that there’s no plan of fiscal adjustment,” said Marina Santos, an economist at Squanto Investimentos in Sao Paulo who was among the three out of 51 analysts that predicted a smaller-than expected interest-rate increase in July in a Bloomberg survey. “Without fiscal adjustment, inflation will pick up and it seems the new government will have a tolerance for higher inflation. She says one thing one day and another thing another day. Investors are demanding higher premium because of uncertainty.”

‘Foundations’

Yields on futures due in 2015 jumped 12 basis points to 11.88 percent yesterday after newspaper O Estado de S. Paulo reported Rousseff may replace central bank president Henrique Meirelles, 65, and push policy makers to lower interest at their first meeting next year. Yesterday’s increase left yields up 24 basis points since Oct. 29. Yields on 2011 contracts held at 10.65 percent during the same period.

A central bank official declined to comment.

Rousseff will “keep the foundations of the current economic policy and not take any action to cause unease in the markets,” her press office said in an e-mailed comment to Bloomberg News. Rousseff served as Energy Minister and cabinet chief under President Luiz Inacio Lula da Silva before stepping down to run for office in March.

The president-elect told reporters on Nov. 3 that she’s considering raising the monthly minimum wage to more than 700 reais ($412) by 2014 from the current 510 reais. Lula’s 2011 budget bill proposed a 5.5 percent increase to 538.15 reais.

Rousseff also said she plans to cut net public debt to 38 percent of gross domestic product in four years from 41 percent. That target is higher than the 28 percent level she outlined in an interview with Veja magazine in June as part of an effort to give the central bank room to lower interest rates.

Benchmark Rate

The central bank boosted its benchmark rate to 10.75 percent from a record low of 8.75 percent in April to prevent Latin America’s biggest economy from overheating. International investors seeking alternatives to near-zero key rates in the U.S., Europe and Japan have poured money into Brazil’s fixed- income, driving the country’s currency to a two-high and helping widen the current account deficit to an annual record of $47 billion.

The government boosted spending 27 percent in the first nine months of the year, helping push inflation above the central bank’s target of 4.5 percent. Consumer prices, as measured by the IPCA index, probably increased 5.1 percent in 12 months through October, from 4.7 percent in September, according to the median forecast of 25 economists surveyed by Bloomberg. The report is scheduled to be released at 6 a.m. New York time.

‘Realistic’

“I don’t think it’s realistic to expect the new president to make any radical change of fiscal programs at all,” said Paulo Vieira da Cunha, a former Brazil central bank director who’s now a partner at Tandem Global Partners LLC in New York. “It’s possible that she will be more careful not to spend rapidly. By doing that, she will help contain some inflationary pressure, but not really much.”

Investor expectations for consumer price increases, implied by the difference between the government’s two-year inflation- linked bonds and fixed-rate notes, climbed to 645 basis points from 635 at the end of October. The gap, known as the breakeven rate, compares with 382 basis points in Mexico.

Yields on interest-rate futures will begin to decline when Rousseff announces her choices for top economic posts, according to Nomura Securities International Inc. She named Antonio Palocci, who as finance minister helped cut the inflation rate to 5.3 percent in 2006 from a high of 17.2 percent in 2003, to lead her transition team.

Yield Spread

Yields on interest-rate futures due in January 2012 fell 5 basis points yesterday to 11.42 percent, signaling traders expect the central bank will raise the benchmark rate to about 12.5 percent by then, according to data compiled by Bloomberg.

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries rose 6 basis points to 180, according to JPMorgan Chase & Co.

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps rose 3 basis points to 97, 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.

The real dropped 1.2 percent to 1.7003 per the dollar.

Brazil’s consumer prices may rise 5.31 percent this year, according to a central bank survey of economists released yesterday, up from 5.29 percent forecast a week earlier. Economists also raised their net debt-to-GDP forecast to 39.64 percent next year, up from 39.57 percent a week earlier.

“The market needs some clarity,” said Virgilio Castro Cunha, head of fixed-income strategy at Bank of America Corp. in Sao Paulo. “At this point, you have virtually zero visibility about the new administration. The market doesn’t know what to look at.”