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Thursday, August 16, 2007

Brazil Treasury Purchases Jump to Record

From Bloomberg today:

Brazil Treasury Purchases Jump to Record

Brazil is purchasing more U.S. Treasury notes than ever as China, for three years the biggest buyer of American government debt, reduces its holdings.

Brazil's portfolio of Treasury securities increased $41.5 billion to a record $93.6 billion in the first half of 2007, Treasury data showed today. That left Brazil ranked fifth among international holders of U.S. debt in June, up from 10th at the end of 2006 and surpassing South Korea and Germany.

The unprecedented demand from Latin America's largest economy is offsetting a weaker appetite in China, which sold U.S. notes for a third month in June. Brazil will sop up more American debt in the short term as Banco Central do Brasil President Henrique Meirelles tries to restrain his country's currency amid a surge in investment, analysts said.

``I would expect the Brazilian central bank to continue intervening and to buy Treasuries,'' said Nuno Camara, an economist who covers Brazil for Dresdner Kleinwort in New York. ``Unlike some Asian central banks that are moving toward some diversification, Brazil can't really take on too much risk, so they put it in Treasuries.''

Brazil has almost doubled its foreign-exchange reserves so far this year to a record of almost $160 billion, from $85.8 billion at the end of 2006. The purchases aim to slow a 49 percent rally in the Brazilian real over the past three years, the biggest gain against the dollar of the 17 major currencies tracked by Bloomberg.

Brazil didn't buy dollars yesterday for the first time since July and refrained again today. The real traded at 2.0295 per dollar at 3 p.m. in New York time, compared with 1.9853 yesterday.

Matching Liabilities

Brazil, the biggest debtor among developing nations, needs to concentrate its reserves buildup on dollar-denominated bonds because most of the country's government and corporate foreign liabilities are in the U.S. currency, said Emilio Garofalo, a former director at the central bank who now runs the investment consulting company EBS Capital in Sao Paulo.

``Brazil's choice of currency for the reserves was always based on future obligations, and that's the way it should be,'' said Garofalo, who managed the reserves for six years. ``Most of Brazil's debt sales have been in dollars.''

Beatriz Dornelles, a spokeswoman for the Brazilian central bank, said the monetary authority doesn't comment on its reserves strategy.

Biggest After China

China, the biggest foreign holder of Treasuries after Japan, sold a net $14.7 billion of U.S. government debt from April through June, the first time the country has sold Treasuries in three straight months since November 2000.

China, with total foreign exchange reserves of about $1.3 trillion, is seeking the prospect of higher returns by shifting some money from the relative safety of U.S. government debt into stocks and corporate bonds: The country bought a record $2.94 billion of U.S. stocks and a net $4.78 billion of corporate bonds in June, the Treasury data showed.

China has more leeway to buy assets denominated in other currencies because its reserves exceed its debt, Garofalo said. For Brazil, buying a bigger proportion of assets in other currencies, betting on bigger gains, would be speculation that the central bank shouldn't engage in, he said.

Swelling Debt

Brazil's total debt owed to creditors abroad -- including liabilities of companies and government -- rose to $182 billion at the end of June, from $157 billion a year earlier. The government's share of foreign debt has risen to $71.2 billion from $64.8 billion over the same period.

While Brazil likely will remain a buyer of Treasuries for at least another year, the country's investments are significant enough ease investors' concern that China will continue selling U.S. debt, said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York.

Brazil's share of all U.S. Treasuries held abroad in June rose to 4.2 percent, from 1.7 percent a year earlier. By comparison, China and Japan accounted for 46 percent of international holdings in June, down from 50 percent a year earlier, according to Treasury figures.

Brad Setser also ran a version of this story:

Almost all Brazilian purchases of US debt show up in the US data. Brazil bought $13b in long-term debt in June ($12.2b of Treasuries) and added $1.1b to its short-term holdings, for $14.1b in net inflows. In q2, Brazil – almost certainly Brazil’s central bank – bought $24.6 b of US long-term debt, and increased its short-term holdings by $2.4b, for a net inflow of $27b.

The net inflow in q2 though was a slightly smaller share of Brazil’s $37.6b reserve increase than in q1. In q1, net inflows from Brazil totaled $22.5b, almost equal to the $23.7b increase in Brazil’s reserves.

Nonetheless, one of the most stunning facts in the TIC data is that Brazil’s central bank provided far more financing to the US Treasury in the first half of 2007 – it bought $41.9b of US Treasury bonds – than the IMF provided Brazil in 2002-03. The IMF’s total lending to Brazil was only a bit more than $30b at its peak. I am always amazed by that particular data point. It drives home just how much the world has changed.

Brazil Real Weakens Past 2-Per-Dollar for First Time Since May

From Bloomberg this morning:

Brazil Real Weakens Past 2-Per-Dollar for First Time Since May

Brazil's currency weakened past the 2.0-per-dollar level for the first time in three months as losses in global credit markets prompted investors to shun riskier emerging-market assets.

The real fell as much as 2.4 percent to 2.0325 reais to the dollar, the first time it breached 2.0 per dollar since May 15. It closed down 2.2 percent to 2.0295 per dollar, following a 2.2 percent slide yesterday. The central bank didn't buy dollars for a second day, after purchasing the U.S. currency in the spot market daily since July 2006.

``Volatility is at unimaginable levels now and nobody can clearly assess the damage caused by loses in credit markets,'' said Ronie Marcelo Germiniani, the proprietary trading manager at Banco Itau SA, Brazil's biggest non-government bank in terms of market value. ``Nobody is going to take significant positions in emerging markets under these circumstances.''

The real has weakened 7.8 percent this month, trimming its advance this year to 5 percent. Losses in the real deepened last week as central banks around the world started injecting cash into money markets last week to prevent losses related to the U.S. subprime rout from causing illiquidity.

The real also fell against the yen today as some investors pulled out of so-called carry trades in which they borrowed in yen and invested in Brazilian fixed-income assets. The real fell 2.7 percent to 57.2676 yen.

The central bank's purchases of dollars until recent days built up foreign reserves, which reached a record $160 billion in July.

As its foreign reserves increased, Brazil's holdings of Treasury securities increased $41.5 billion to a record $93.6 billion in the first half of 2007, Treasury data showed today. That left Brazil ranked fifth among international holders of U.S. debt in June, up from 10th at the end of 2006 and surpassing South Korea and Germany.

Dollar Purchases

Finance Minister Guido Mantega said yesterday the central bank deemed it unnecessary to buy dollars. ``The central bank isn't obliged to carry out dollar auctions every day,'' Mantega told reporters in Brasilia yesterday.

``There was some talk yesterday that the non-intervention was a sign the bank saw this crisis as really damaging, and was worried it may make things worse by buying dollars,'' Germiniani said. ``So the bank may act today just to show that their outlook is still for the real to appreciate because of strong investment flows.''

The real's recent declines will bolster profit margins at manufacturers, including textile and shoe makers, which have been squeezed in international export markets by the real's rally, said Pedro Bastos, chief executive officer for the Brazilian asset management unit of HSBC Holdings Plc.

``The weaker real gives those sectors a reason to celebrate now,'' Bastos said in an interview in Sao Paulo.

Retail Sales

A government report today showed Brazilian retail sales rose 11.8 percent in June from a year earlier. The increase in retail, supermarket and grocery store sales, as measured by units sold, was more than the 10.6 percent rise in May and higher than the median 11.3 percent rise forecast in a Bloomberg survey of 28 analysts. Retail sales increased a seasonally adjusted 0.4 percent in June from May and rose 8.2 percent in the 12 months through June.

The yield on Brazil's benchmark zero-coupon bonds due January 2008 rose 8 basis points, or 0.08 percentage point, to 11.27 percent, the biggest rise since the yield jumped 9 points to 11.14 percent on July 26, according to Banco UBS Pactual SA.

Sell-Off Of Brazilian Assets

From the FT Today:

Brazil’s financial assets hit by global turmoil

By Jonathan Wheatley in São Paulo

Published: August 15 2007 23:18 | Last updated: August 15 2007 23:18

Brazilian financial assets broke through significant support levels on Wednesday as turmoil on global markets threatened to reach a part of the world that had seemed relatively free from contagion.

“Brazil is not immune at all,” said Christian Stracke of Credit Sights, a research firm. “Brazil is arguably more exposed to the global economy and to global financial markets than ever before.”

Much of the fall in Brazilian assets is explained by investors selling to cover losses in other markets.

But the extent of the slippage suggests investors may be sensing Brazilian assets are riskier than previously suspected.

Brazil’s currency, the real, lost 2 per cent against the US dollar on Wednesday to break below R$2.00 for the first time in three months.

The São Paulo Stock Exchange Index fell 3.2 per cent to 49,285 points, its first close below 50,000 points since early May, bringing losses over the past month to more than 15 per cent.

The sell-off came as fear spread around global markets that contagion from the US subprime lending crisis was spreading to other asset classes.

“This is no longer a subprime crisis, this is a full-blown structured product crisis,” Mr Stracke said.

As recently as last week fund managers said Brazilian markets were immune to contagion because they were free of high-risk, illiquid securities. “What’s happening is a massive unwinding from risk, and it’s hard to see Brazil falling into that category any more,” said one New York hedge fund manager.

But analysts such as Mr Stracke argue that foreign investors have become exposed to high-risk credits in Brazil through the large amount of debt raised overseas by Brazilian financial institutions.

Last year, $18.8bn entered Brazil as foreign debt, the vast majority raised by banks. They invested some of it in high-yielding public securities. But a significant amount was passed on as consumer credit.

Total financial sector credit in Brazil stands at about $395bn, of which $135bn is consumer credit and $260bn, corporate. Foreign banks account for 36 per cent of the total, according to Anefac, a financial markets association that monitors credit.

Consumer credit is the engine of recent growth in Brazil. The economy grew by 3.7 per cent last year and will grow by about 4.5 per cent this year – a significant improvement on the average of 2.5 per cent over the previous 15 years.

Yet the credit that is fuelling growth is extraordinarily expensive for various historical reasons. Credit card debt bears interest of 224 per cent a year, according to Anefac. The overdraft rate is 145 per cent. Even debt with a reasonable level of collateralisation, such as payroll-linked or car loans, costs between 15 and 33 per cent a year.

It is this credit to which international investors are indirectly exposed. Roberto Vertamatti, director of Anefac’s financial committee, said such risk was so far perceived as of little significance. “But there is always a risk and the exposure is certainly there,” he said.

Mr Vertamatti said some 15 per cent of Brazilian credit was securitised through instruments such as receivables funds, often traded between financial institutions. He said the risk that Brazilian banks could be exposed directly to subprime lending in the US was minimal and would easily be dealt with by the central bank relaxing restrictions on liquidity.