Brazil’s Bond Yields Fall as Output Slide Raises Rate Cut Bets

By Adriana Brasileiro

Dec. 2 (Bloomberg) -- Yields on Brazil’s local-currency bonds and interest-rate-futures contracts dropped as slower industrial output growth fueled speculation that deflation may lead the central bank to cut borrowing costs.

“The whole market can see very clearly now that there is no way the central bank will increase rates, and that a cut is inevitable,” said Marcio Ezequiel, head of fixed-income trading at Agora Corretora, Brazil’s largest brokerage, in Sao Paulo.

The yield on Brazil’s zero-coupon bond due in January 2010 fell 32 basis points, or 0.32 percentage point, to 14 percent, according to Banco Votorantim. It reached 13.99 percent, the lowest level since May 15.

Brazil’s industrial output increased at a 0.8 percent annual rate in October, the national statistics agency said. The median forecast of 27 economists surveyed by Bloomberg News was 3.6 percent.

The data signals economic growth will slow in the fourth quarter against the third, putting Latin America’s biggest economy “on pre-recession footing,” Tony Volpon, chief strategist at CM Capital Markets in Sao Paulo, wrote in an e-mail to clients today.

The yield on the nation’s overnight futures contract for January 2010 delivery dropped 33 basis points to 13.86 percent, showing the market is starting to price in a rate cut early in 2009, Volpon said. Brazil’s benchmark target Selic interest rate is 13.75 percent.

The real rose the most in almost a week as gains in U.S. equity-index futures revived investors’ appetite for higher- yielding local assets. The currency climbed 0.4 percent to 2.3291 per dollar, from 2.3373 yesterday. The real gained as much as 2.1 percent to 2.2971 earlier.

Brazil’s real has dropped 29 percent against the dollar in the past three months, the worst performance among the 16 major currencies tracked by Bloomberg.

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net