Thursday, 12 March 2009

Market Roundup by IDEAGlobal -- Brazilian Local Yields React to Policy Front-Loading ... We Told You So!

IDEAGlobal, the New York-based economic research company, said local investors in Brazil were expecting policy makers at the central bank to overreact to the the very negative activity numbers and speed up monetary policy action with a 100+ basis-point cut. Their view grew more dovish since the past month -- as other economists including Marcelo Carvalho of Morgan Stanley were already pessimistic about the trend, let's say, four months ago maybe? Kudos for Carvalho and his team -- who says Brazil will be on a recession as early as April. Check on these postings -- (one) and (two) and (three) ... Rates were to fall, and a dramatic correction in local yields was expected.

The Copom, as the bank's body in charge of setting monetary policy is known in Brazil, trimmed the Selic target rate to a record low of 11.25 percent last night (a reduction of 150 basis points.) ''Local markets have long been anticipating an acceleration of the trend towards lower rates on the part of the Brazilian central bank, which has placed this nation in a similar situation to major fixed-income markets in Latin America, as rates along domestic curves compress against those held on U.S. dollar-denominated sovereign curves,´´ writes the shop.

IDEAGlobal says: ''the constant decrease in the offered yield on the 2017 NTN-F (inflation-linked securities with long maturities) has moved the spread between this instrument and that of the 2017 dollar-denominated Global down to positive 576 basis points, after last year’s extreme blowout in differentials.´´ A more dramatic drop in the real may hamper this spread compression trend, because the weaker the real, the bigger the perceptions of future inflation -- and NTN-Fs are inflation-linked securities. ''Inflation importation takes a hold on longer-duration NTN-F paper,´´ IDEAGlobal clarifies.

The shop's expectation is that ''domestic rates remain in a downtrend as the domestic growth picture continues to complicate, while the external front of dollar Global bonds draws little interest as the recessionary environment takes stronger hold in Latin America.´´ It recommends playing ''long Brazil’s 2017 NTN-F against short the 2017 Global bond, looking for spreads to trend towards more than 500 basis points, while stopping out of this exposure if we witness a reversal back towards spreads of 620 to 630 basis points.´´

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