The decision of the Brazilian authorities to raise Brazil’s key interest rate to 11%, its highest in two years, has again started to attract investors. There are also hopes that Brazil’s next president to be elected in October will rein in spending and adjust macroeconomic policies.
The big question, however, is whether Brazil’s currency, the real, will sink further and wipe out returns on real-denominated bonds. For some the danger is modest enough to handle, especially for the double digit yields.
Brazil’s Central Bank on raised interest rates for the ninth straight time, extending one of the world’s longest rate tightening cycles after a surge in food prices added to the country’s already high inflation. Since April 2013, the Central Bank has increased its benchmark interest rate 3.75 percentage points.
That has prompted some investors, who had been rushing out of the country’s equity market over concerns about high inflation and tepid growth, to consider Brazilian bonds. Brazil’s 10-year bond yields 12.8% in local currency, compared with a yield of 2.79% for a 10-year note in the United States.
But investors who buy fixed income securities run the risk that inflation will continue to cut into real returns. On March 27, Brazil’s central bank increased its 2014 inflation forecast to 6.1% from its earlier estimate of 5.7%, and raised its 2015 inflation estimate to 5.5%.
Those moves have come amid wide swings in the value of Brazil’s currency. Since January 2013, the value of the real against the dollar has fallen approximately 15%, from 1.96 per dollar to 2.26. Should the real continue to fall, US-based investors who convert their earnings from real to US dollars will see the value of their positions erode.
Foreign investors typically cannot buy Brazilian bonds directly unless they put in a large order through their broker. And, with no exchange-traded funds investing solely in Brazilian debt, analysts say the best alternative are emerging markets bond ETFs which count Brazil among their largest country allocations.
Rousseff Support Down
The popularity of Dilma Rousseff, Brazil’s president, has fallen 5% ahead of October’s presidential elections, revealed a new poll published on Sunday. The DataFolha polling institute said 36% of respondents rated Rousseff’s government as “great/good” against the 41% who gave it that rating in the firm’s previous poll conducted in February.
The poll was published by the Folha de S. Paulo newspaper. DataFolha surveyed 2,637 people on April 2 and 3. Its poll has a margin of error of 2 percentage points.
The poll also showed that the number of people who say they will vote for her dropped from 44% to 38%. However, the new figures leave her ahead of her two main expected challengers, senator Aécio Neves with 16% and former Pernambuco state governor Eduardo Campos with 10%.
According to DataFolha, 63% of those interviewed said Rousseff has done less than they expected, compared to 34% a little more than a year ago.
DataFolha attributed the drop in Rousseff’s popularity to rising inflation that now stands close to 6% and fears of unemployment and lower purchasing power, as the Brazilian economy continues to limp along.
However the government is betting that the national team at the coming World Cup (June/July) can change the mood of the country.