Greenspan Conundrum Is Lula's Gain as Long-Term Yields Sink

The biggest foreign purchases of Brazilian local bonds in three years are pushing longer-term borrowing costs below yields on two-year debt for the first time since October 2008.
Yields on fixed-rate government bonds due in 2017 have declined 106 basis points, or 1.06 percentage points, in the past three months to 11.49 percent. The plunge in 2017 yields put them as much as eight basis points below yields on notes maturing in 2012 last week. A year ago, longer bonds yielded 171 basis points more than the shorter-term securities.

Record low yields in the U.S. and Europe spurred foreigners to buy a net $16 billion of Brazilian bonds from January through July, compared with $9.1 billion for all of 2009, according to the central bank. International investors are piling into longer-term debt, helping trim President Luiz Inacio Lula da Silva’s borrowing costs, in part as a bet slowing inflation will push down rates in coming years, according to Citigroup Inc.

“We are seeing relentless inflows,” Dirk Willer, head of Latin America local markets strategy at Citigroup in New York, said in a telephone interview. “Some of the investors are betting on the convergence trade.”

Brazil Interest Rate Futures Drop to 11-Month Low on Global Growth Concern

Yields on Brazil’s interest-rate futures contracts declined to an 11-month low on speculation slowing global economic growth may prompt Central Bank President Henrique Meirelles to stop raising interest rates.

The yield on the contract due in January 2012 fell two basis points, or 0.02 percentage point, to 11.13 percent, the lowest level since September, at 9:22 a.m. New York time. At 10.69 percent, the contracts due in January 2011 imply the central bank may keep its benchmark borrowing costs at 10.75 percent for the remaining three policy meetings this year.