BRASILIA: The Brazil selloff that pushed the real to a 12-year low and sent bond yields to a record high is starting to lure money managers wagering that things can’t get much worse.
Investors who can stomach the volatility can pick up dollar-denominated notes that yield over two percentage points more than similarly rated Philippines bonds, while 10-year government securities in reais pay holders about 14 percent, a rate that trails only Nigeria among major emerging markets.
Optimists are betting that Latin America’s largest economy has plenty of long-term potential even amid a rout driven by the worst recession since 1990, talk of impeaching the president, soaring inflation and stifling interest rates. Things are bad right now, they acknowledge, but they’ll turn around.
“It’s a bit baffling to us why the market is punishing Brazilian assets so much,” said Bryan Carter, a portfolio manager who helps oversee about US$360 million of emerging-market debt at Acadian Asset Management in Boston. “The headlines don’t read well, but at the end of the day, they still make money in Sao Paulo and go to the beach in Rio. The country is not falling apart.”
In fact, Brazil is “extremely attractive,” said Carter, who bought some of the country’s dollar bonds in recent weeks and sold shorter-term local notes to buy higher-yielding, longer-term debt. It still has a rapidly growing middle class, plenty of oil and iron ore to pull out of the ground and a solid amount of external reserves to avoid a debt crisis.
That said, the carnage during the past year has been severe and shows few signs of slowing after President Dilma Rousseff’s popularity sank to just eight percent in a Datafolha poll released on Thursday, the lowest level on record. Of the 3,358 people surveyed, two-thirds said Congress should open impeachment proceedings against her.
Concerns that the political turmoil could harm efforts to shore up fiscal accounts have sent the real tumbling, pushing losses in the past year to 35 percent, the worst performance among 16 major currencies Bloomberg tracks. The extra yield investors demand to own the country’s dollar bonds instead of Treasuries is approaching a six-year high as traders speculate the country could lose its investment-grade rating.
The real rose 1.5 percent yesterday at 3:34pm in New York.
Policy makers have increased the benchmark interest rate at seven consecutive meetings, pushing it to 14.25 percent, a nine-year high. While that discourages the kind of investment needed to spur growth, inflation keeps accelerating. The annual rate reached 9.56 percent in July — more than double the official target.
Yields on notes due 2019 from state-run oil producer Petróleo Brasileiro — rated investment grade by Standard & Poor’s and Fitch — jumped to 7.55 percent on Friday. That’s higher than similar-maturity bonds issued by Angola, which is rated three steps lower by Fitch and four by S&P as it recovers from a 27-year civil war that ended in 2002.
The slump in the country’s local currency bonds due in 2025 also pushed yields to a record 13.88 percent on Friday.
“There’s value in local-currency debt,” Denise Prime, a money manager at GAM International Management Ltd., said by email. Her firm oversees about US$120 billion in assets. “We are keeping an eye on the market for opportunities. The Central Bank has hiked rates aggressively, and with growth slowing sharply, we expect inflation to come down. This will enable the central bank to cut rates from next year on.”
Rousseff will finish her term, pare fiscal deficits and protect Brazil’s credit rating, Finance Minister Joaquim Levy said in an interview on Thursday.
Brazilian debt is attractive after the selloff pushed yields to levels in line with a junk rating, according to Cathy Hepworth, a Newark, New Jersey-based money manager who helps oversee US$32 billion at Prudential Financial Inc. She declined to comment on any recent changes to her Brazil positions.
“While the political noise will increase, and with it the potential that President Dilma leaves office, we do not anticipate a debt crisis,” she said by email. “Current valuations — with perhaps a bit more downside — could prove to be an attractive buying opportunity.”
