'Junk' sovereign rating puts ceiling on Brazil bull market

lunes 10 de octubre de 2016 14:32 GYT

By Bruno Federowski

SAO PAULO Oct 10 (Reuters) - Brazilian financial markets are unlikely to repeat their dramatic rally in 2016 even if Congress approves a business-friendly reform agenda during the coming year, as asset values are nearly at the ceiling of the country's junk credit rating.

Brazil's bonds, stocks and currency have been among the best-performing assets in the world this year as investors welcomed promises by new President Michel Temer to pass measures capping spending and trimming public pensions.

Investors are now waiting anxiously to see if Temer can make good on those promises, but even if a fragmented Congress approves his ambitious reform agenda, analysts say there is little room for more dramatic rises.

"Brazil has gone a long way and much of the good news is already priced in," said Viktor Szabo, a portfolio manager at Aberdeen Investments, who is reducing exposure to the Brazilian government's dollar-denominated debt.

Promises of reforms have already made investors far more willing to lend to Brazil. Yields on 10-year Brazilian local-currency bonds narrowed by more than 500 basis points so far this year, setting off an accompanying "cost of capital" rally for stocks, according to Credit Suisse analysts.

Brazil's five-year credit default swaps (CDS) , a gauge of default risk, paved the way for this year's bull market by rallying to 264 basis points on Monday from nearly 500 at the start of the year.

That is below the average of 294 basis points for countries that share Brazil's double-B credit rating from the three main ratings agencies, testing how far spreads can go for Latin America's largest economy without an investment-grade rating.

The CDS of triple-B-rated countries trade as high as 240 basis points, as in the case of South Africa, and average around 140 basis points.   Continuación...