Less treasury bonds sold from May returns After Jump

Brazil is on sale this month the least amount of local bonds since May as a tax increase for foreign investors and speculation that the central bank will raise interest rates next year eroded demand for the securities.

The government has sold 19.5 billion reais ($ 11.3 billion) dollars in bonds in November, including 5.1 billion reais in the auction yesterday, after the issuance of 38.2 billion reais worth of securities in October. It sold 13.4 billion reais of debt in May, when the debt crisis of Europe increasingly pushing up yields in emerging markets.

Yields on benchmark bonds due in 2021 rose to a maximum of six months was 12.77 percent this week after President Luiz Inacio Lula da Silva tripled a tax on purchases of foreign debt to 6 percent last month to curb investment and the mother of a manifestation of foreign exchange. The yield has increased 54 basis points since the first of two increases in the IOF called on 4 October, nearly double the increase of 29 basis points in bond yields similar to the maturity of the Mexican peso during that time.

"All I've managed to do is that the cost of financing more expensive," Edwin Gutierrez, who helps manage $ 6 billion in emerging market debt at Aberdeen Management Plc in London, including Brazilian local debt. "The market is not happy now with the course of politics in Brazil and is expressed displeasure in the bond market."

The government sold bonds due in 2021 at an average yield of 12.36 percent and maturing in 2017 to 12.18 percent yesterday. He rejected all offers of securities maturing in 2015.

'Temporary'

Deputy Treasury Secretary Paulo Valle said the government has reduced its sales of fixed rate debt to avoid "put pressure on the market."

"This is temporary," Valle said in a telephone interview from Brasilia. "These values were well quoted volatility before collected."

Brazil will have to pass the sales of a backup to avoid cutting into their cash reserves, Vivienne said Taber, who helps manage $ 5 billion in emerging market debt at Investec Asset Management in Cape Town. Investec cut its "overweight" position in Brazil's bonds after the tax increase, he said.

"You can not have your cake and eat it," Taber said in a telephone interview. "No one can say that we want the flow to enter, but not too fast. I could probably wait a couple of months, but sooner or later must return to the market."

The government is not concerned about its cash position, equivalent to about six months worth of principal payments on debt, "said Fernando Garrido, head of the Public Debt Operations Department of the Treasury.

Overseas sales

"It makes no sense that this fall in the long run, sales of fixed rate bonds in November will make the lack of liquidity in the future," Garrido said in a telephone interview from Brasilia. "The Treasury has no liquidity problems."

He said the authorities may consider selling more real linked bonds abroad, where yields are lower than in the local market.

Last month the government issued one billion reais of bonds due in 2028 at its first foreign offer in the local currency debt in three years. The bonds yielded 8.85 percent, below the performance of yesterday's auction of bonds due in 2021, the longest maturity of fixed rate in the Brazilian market.

Local bonds also fell as traders bet Alexandre Tombini begin raising the benchmark interest rate to curb inflation in his first month as central bank president in January. The president-elect, Dilma Rousseff, nominated Tombini, a central bank director since 2005, Nov. 24 to replace Henrique Meirelles.

Inflation collection

The annual inflation rate rose to 5.2 percent in October, above the central bank's target of 4.5 percent as a jump of 27 percent in public spending in the first nine months of the year boosted demand consumers. Central banks have kept the benchmark rate at 10.75 percent in July after rising 200 basis points over a period of four months to cool the fastest expansion since the 1980s in Latin America's largest economy.

Yields rate futures overnight due in January 2012 have increased 35 basis points, or 0.35 percentage point from November 17 to 11.93 percent at 8:09 am New York time, traders expect the bank showing the rate increase to about 12.75 percent by the end of 2011. Tombini, 46, declined to comment on the outlook for rates at a press conference in Brasilia on November 24.

"At some point, the market is saying that inflation will begin to affect the performance requirement," said Enrique Alvarez, head of Latin America fixed income research at IDEAglobal in New York, in a telephone interview. "The rates at some point will have to move higher."

"Overheating" economy

The cost of protecting debt of the nation against non-payment for five years with credit default swaps, had climbed 3 basis points to 112 this week through yesterday, according to data compiled by CMA. Swaps credit-default pay the buyer face value in exchange for the underlying securities or the cash equivalent of a government or a company fail to adhere to its debt agreements.

The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries rose 4 basis points this week to 181 today, according to JPMorgan.

The real fell 0.3 percent to 1.7274 per dollar today from 1.7265 yesterday. It has gained 1 percent this year after rising 33 percent in 2009, helping push the country's current account deficit of 12 months to a record $ 48 billion.

The economy will expand 7.6 percent this year after shrinking 0.2 percent in 2009, according to the median forecast in a central bank survey of economists released on November 22.

While Brazil's gross domestic product is growing, there is growing concern that global economic expansion falters after Ireland joined to Greece this month in the organization of an aid package to cover its financing needs. Ireland's long-term debt rating was reduced to two steps by Standard & Poor's Nov. 23 to AA-, undercutting demand for emerging market debt.

Brazil, the "economy is overheating now, to be honest," Gutierrez said of Aberdeen. "They have to be stricter policy is not what the market is signaling that disapproval. The environment of global risk aversion has also contributed to the problem."