Barclays Plc recommended investors buy Brazil’s local-currency fixed-rate bonds instead of the country’s inflation-linked debt as “economic slack” and a strengthening real keep consumer prices increases in check.
Barclays strategists Paulo Mateus and Rogerio Oliveira advised investors to switch from NTNBs, or local-currency bonds linked to the benchmark IPCA consumer price index, to NTNFs, the 10 percent coupon securities, as the yield gap between those bonds will probably narrow as inflation slows.
The yield on the 10 percent real-denominated bonds due in January 2017 rose one basis point, or 0.01 percentage point, to 13 percent at 11:34 a.m. New York time. The yield on the notes linked to the IPCA index maturing in May 2017 climbed four basis points to 6.5 percent, according to Bloomberg data.
“Despite the ongoing economic recovery, we foresee a benign medium-term inflation outlook in Brazil, due to the domestic economic slack, global disinflationary forces and the real’s recent appreciation,” Mateus and Oliveira wrote in a note to clients today.
Annual inflation, as measured by Brazil’s IPCA index, slowed to 4.8 percent in June, down from 5.2 percent in May and the lowest since March 2008. Policy makers last month reaffirmed that they seek to slow inflation to 4.5 percent by yearend.
Barclays strategists expect the IPCA price index to end at 4.3 percent this year and 4 percent in 2010.
“I don’t see a very strong economic recovery, or a strong bounce going on, so I see a more gradual pick-up in the economy, which should keep inflationary pressures subdued,” Mateus said in a telephone interview from Sao Paulo. Economists expect Brazil’s economy to shrink 0.34 percent this year, according to a median forecast in a central bank survey published July 20.
CPI Forecast
Consumer prices, as measured by the government’s benchmark IPCA price index, will rise to 4.53 percent this year, according to the central bank survey.
Brazil’s consumer prices rose 0.22 percent in the month through mid-July, the government’s statistics agency said today. Economists expected prices, as measured by the benchmark IPCA-15 index, to rise 0.37 percent, according to the median of 31 forecasts in a Bloomberg survey.
“The breakeven inflation, which is the difference in the yield paid on the NTNFs and the yield on the NTNBs, is too high on the long end of the curve,” Mateus said. “As we expect the breakeven inflation to go down, the performance of the NTNFs relative to NTNBs will be much better.”
‘Benign’ Outlook
A “benign” inflation outlook over the next two years and the prospect for lower inflation targets in the “long term’” will support local-currency fixed-rate bonds, he said.
Policy makers, led by bank President Henrique Meirelles, lowered the key rate by half-point to a record 8.75 percent on July 22, as expected by 49 of 50 analysts surveyed by Bloomberg. They have slashed borrowing costs from 13.75 percent at the beginning of the year in a bid to pull Latin America’s largest economy out of its first recession in five years.
The real has gained 22 percent this year, the second-best performer among the 16 most-traded currencies tracked by Bloomberg, behind the South African rand.
By Fabio Alves
To contact the reporter on this story: Fabio Alves in New York at falves3@bloomberg.net
Barclays strategists Paulo Mateus and Rogerio Oliveira advised investors to switch from NTNBs, or local-currency bonds linked to the benchmark IPCA consumer price index, to NTNFs, the 10 percent coupon securities, as the yield gap between those bonds will probably narrow as inflation slows.
The yield on the 10 percent real-denominated bonds due in January 2017 rose one basis point, or 0.01 percentage point, to 13 percent at 11:34 a.m. New York time. The yield on the notes linked to the IPCA index maturing in May 2017 climbed four basis points to 6.5 percent, according to Bloomberg data.
“Despite the ongoing economic recovery, we foresee a benign medium-term inflation outlook in Brazil, due to the domestic economic slack, global disinflationary forces and the real’s recent appreciation,” Mateus and Oliveira wrote in a note to clients today.
Annual inflation, as measured by Brazil’s IPCA index, slowed to 4.8 percent in June, down from 5.2 percent in May and the lowest since March 2008. Policy makers last month reaffirmed that they seek to slow inflation to 4.5 percent by yearend.
Barclays strategists expect the IPCA price index to end at 4.3 percent this year and 4 percent in 2010.
“I don’t see a very strong economic recovery, or a strong bounce going on, so I see a more gradual pick-up in the economy, which should keep inflationary pressures subdued,” Mateus said in a telephone interview from Sao Paulo. Economists expect Brazil’s economy to shrink 0.34 percent this year, according to a median forecast in a central bank survey published July 20.
CPI Forecast
Consumer prices, as measured by the government’s benchmark IPCA price index, will rise to 4.53 percent this year, according to the central bank survey.
Brazil’s consumer prices rose 0.22 percent in the month through mid-July, the government’s statistics agency said today. Economists expected prices, as measured by the benchmark IPCA-15 index, to rise 0.37 percent, according to the median of 31 forecasts in a Bloomberg survey.
“The breakeven inflation, which is the difference in the yield paid on the NTNFs and the yield on the NTNBs, is too high on the long end of the curve,” Mateus said. “As we expect the breakeven inflation to go down, the performance of the NTNFs relative to NTNBs will be much better.”
‘Benign’ Outlook
A “benign” inflation outlook over the next two years and the prospect for lower inflation targets in the “long term’” will support local-currency fixed-rate bonds, he said.
Policy makers, led by bank President Henrique Meirelles, lowered the key rate by half-point to a record 8.75 percent on July 22, as expected by 49 of 50 analysts surveyed by Bloomberg. They have slashed borrowing costs from 13.75 percent at the beginning of the year in a bid to pull Latin America’s largest economy out of its first recession in five years.
The real has gained 22 percent this year, the second-best performer among the 16 most-traded currencies tracked by Bloomberg, behind the South African rand.
By Fabio Alves
To contact the reporter on this story: Fabio Alves in New York at falves3@bloomberg.net
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