U.S. investors look to profit on Brazil rate hike
By Ashley Lau and David Randall
NEW YORK, April 4 (Reuters) - Brazil's decision to hike its key interest rate to 11 percent, its highest level in two years, has some yield-hungry U.S. investors smacking their lips.
After all, they argue Brazil has an upside and may carry less risk than the other BRIC countries of Russia, India and China. Hopes that Brazil's next president to be elected in October will rein in spending and adjust macroeconomic policies sparked a rally in domestic markets in the past few days.
The big question is whether Brazil's currency, the real, will sink further and wipe out returns on real-denominated bonds. For some the danger is modest enough to handle, especially for the sweet double digit yields.
"When you look around at the local emerging market debt market, Brazil actually looks very attractive," said Gerardo Rodriguez, senior investment strategist for BlackRock's emerging markets group. "There was some uncertainty in the policy mix, but now with the central bank being more aggressive on the tightening cycle, you're having some stability and it has been a good entry point for many investors, especially on the long end of the curve."
Brazil's central bank on Wednesday raised interest rates for the ninth straight time, extending one of the world's longest rate tightening cycles after a surge in food prices added to the country's already high inflation. Since April 2013, the central bank has increased its benchmark interest rate 3.75 percentage points.
That has prompted some investors, who had been rushing out of the country's equity market over concerns about high inflation and tepid growth, to consider Brazilian bonds. Brazil's 10-year bond yields 12.8 percent in local currency, according to Thomson Reuters data, compared with a yield of 2.79 percent for a 10-year note in the United States.
"If you're an investor (in the Brazilian market) sitting on money, and you're saying where should I put my next incremental investment, the rates you're going to get in that bond market just got more attractive," said Dave Nadig, chief investment officer at San Francisco-based research and analytics firm ETF.com. "That's where there's an immediate direct impact."