Saturday, May 16, 2009

Brazil: New Bond Issuance and Single Digit Interest Rates

Brazilian National Treasury: Successful Bond Issuance in International Markets

According to the latest report by the Brazilian National Treasury, the institution just reopened the issuance of the Global bond 2019N, reaching US$ 750 million. The issuance, managed by Barclays Capital and Citigroup Global Markets Inc. was priced at 100.539% of its face value, with a 5.80 % p.y. yield. Coupon payments set in 5.875% p.y. are to be paid semi-annually every Jan-15th and Jul-15th up to maturity in January 2019. The spread over treasury reached 252 bp. Considering that this is the second time this year that Brazil is succefully issuing bonds in the international markets we should praise the low spread charged in the issuance. Last time, the demand for Brazilian bonds was so intense that the initial offer of $500 million had to be increase to $750 million . Also, compared to the last time, it seems to be the case that market conditions were better for Brazil, this time, especially considering that the yield dropped from 6.127% per year to 5.80% per year. In other words, Brazil is paying a lower fee for the people to buy Brazilian bonds, suggesting that the country is less riskly than it was in January. It is also possible to attribute the lower yield to more peaceful market conditions now than the ones we had in January.

Different and better from the October-December, 2008 period, Brazilian companies have issued $3,150 million in external bonds in international markets since January. The bonds’ maturity range from 5 to 10 years. The improvement in the maturity, from the private companies, suggests that the National Treasury of Brazil is building up a reputation in the international markets and this is being transmitted to the private Brazilian companies, who are reaping the benefits of a better debt profile.


Single Digit Interest Rates

The attainment of government-administered single-digit interest rates in Brazil is revolutionary. The government is en route to foster the development of a solid mortgage-finance market which barely exists at present. As we previously explained earlier, the authorities announced that tax adjustments to savings deposit accounts (increase from 2010 onwards) and fixed-income funds (decrease) will be implemented to help the process of interest rate normalization in the months ahead. The next monetary policy committee (COPOM) meeting is scheduled for June; market and we expect the Copom to decrease rates by 50 bp from 10.25%.

Meanwhile, Brazilian financial markets, which were subject to the correction headwinds in place in riskier asset classes earlier in the week, recovered an upward trend. However, it seems that signs of a technical overvaluation may call for a defensive position in Brazilian stocks, in particular, after a sharp rally materialized since early-March. The Brazilian real did not abandon its stable-to-appreciating bias and closed the week at 2.07 per USD.

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