Brazil's interest-rate futures jump on inflation fears
By Walter Brandimarte RIO DE JANEIRO, Aug 5 (Reuters) - Yields paid on Brazil's interest-rate futures contracts, particularly the longest-dated ones, rose sharply on Tuesday as a weakening real fueled inflation fears, as did estimates that electricity costs will jump higher than expected in 2015. Concern about the government's ability to meet its fiscal savings target for 2014 also weighed on market sentiment, boosting rates. Interest rates futures for January 2016 climbed 22 basis points to 11.53 percent while those for January 2017 rose 23 basis points to 11.82 percent. "The fear is that administered price increase would be greater than expected and this is putting pressure" on the yield curve, Kenneth Lam, a Citi strategist for Latin American local markets, wrote in a note to clients. Power utility bills are forecast to rise sharply in 2015 to make up for the intensive use of more expensive thermoelectric plants in 2014, when a severe draught reduced hydroelectric generation. An expected increase in domestic fuel prices will also boost inflation, which currently stands at the ceiling of a government target. Recent losses in the real, which has weakened nearly 4 percent in little more than a month, also contributed to inflation fears as it increases prices of imported goods. The yield curve now prices in bets that Brazil's benchmark Selic rate will rise 1 percentage point during 2015, from the current level of 11 percent to 12 percent. On Monday, bets were that the Selic would rise by 0.75 percentage points in 2015. Yields paid on shorter-dated contracts also rose despite expectations that the central bank will leave the Selic stable at 11 percent until at least the end of the year. Contracts maturing in January 2015 rose 6 basis points to 10.88 percent. "After focusing on the weak economic activity for weeks, the market is again worried about inflation and Brazil's fiscal performance," said Jayro Rezende, a manager at the derivatives desk of CGD Securities in Brazil. Concern about Brazil's ability to meet its 2014 fiscal target increased after the country's federal audit court suspended the publication of rules for an auction of fourth-generation (4G) broadcast spectrum, which is expected to bring 8 billion reais ($3.5 billion) to government coffers. Last week, Brazil's Treasury Secretary Arno Augustin said the government was counting on that money to meet its 2014 fiscal target. Most traded interest-rate contracts at 1245 GMT: month ticker last(pc previous change(p.p. t) close(pct) ) OCT4 10.82 10.8 0.02 NOV4 10.83 10.81 0.02 JAN5 10.88 10.82 0.06 JAN6 11.53 11.31 0.22 JAN7 11.81 11.59 0.22 JAN1 12.05 11.87 0.18 (Additional reporting by Bruno Federowski in São Paulo; Editing by David Gregorio)
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