Brazil is turning into the world's biggest buyer of US debt even after Finance Minister Guido Mantega criticised the Federal Reserve's steps to stimulate economic growth by buying Treasuries.
Brazil bought $13.4 billion (Dh49.2 billion) of US debt in April, more than any other country and almost double the purchases by China, according to data compiled by the US Treasury. Its holdings of Treasury debt rose 6.9 per cent, the most since October 2009, to a record $207 billion. China, the world's biggest owner, and Russia, have been reducing their holdings over the past six months.
Brazil's US debt holdings are soaring as the central bank intervenes in the currency market to stem a two-and-a-half-year, 44 per cent rally in the real, leaving policy makers with billions of dollars to invest overseas. Yields on two-year bonds are more than 12 percentage points higher than those on US Treasuries, attracting foreign capital to Latin America's biggest economy.
"There are not a lot of things you can do with a lot of dollars, except buy US Treasuries," Paul McNamara, who manages $7.5 billion of emerging-market assets at GAM Investment Management in London, said in a telephone interview. "Even though Brazil is worried about the dollar weakness, they look at it in a quite coldblooded way they would rather pay that price in return for keeping certain industries and a certain level of employment and not worrying about the exposure."
The yield difference between Brazilian real-denominated bonds maturing in 2013 and similar-maturity US Treasuries has widened to 12.1 percentage points, near the widest gap since December 2008, according to data compiled by Bloomberg.
Investors seeking higher-yielding alternatives to near-zero rates in the US and Japan are pouring money into Brazil, fuelling gains in the real. Net foreign-currency inflows from trade and financial transactions amounted to $39.5 billion this year, exceeding the total amount of $24 billion in all of 2010, according to the central bank.
Brazilian policy makers have bought $35.8 billion of US currency this year through mid-June, more than double the $14 billion they purchased during the same period last year, to prevent those inflows from extending the real's advance. Reserves have swelled 16 per cent this year to a record $336 billion. The real reached 1.557 per dollar on April 27, the strongest level since August 2008.
"They've got more reserves than they need," Kevin Daly, who helps manage $6.5 billion in emerging-market funds at Aberdeen Asset Management, said in a telephone interview from London. "But the inflow is just enormous.
They have to do something to prevent it from strengthening even further. It's just reality."
The country's holdings of Treasuries have increased 11 per cent this year and doubled since June 2007. China, the largest creditor to the US, bought $7.6 billion of US debt in April, after cutting its holdings for five straight months from a record high of $1.18 trillion to $1.15 trillion. Russia holds $125 billion of Treasuries, down from $176 billion in October.
US government data on Treasury bond holdings include all institutions in each country. The central bank is the primary buyer in Brazil, accounting for about 90 per cent of the country's holdings, according to Roberto Padovani, chief economist at Banco WestLB do Brasil SA.
About 82 per cent of Brazil's reserves were invested in dollar-denominated assets as of the end of 2009, according to the central bank.
The central bank and the Finance Ministry declined to comment in separate e-mailed statements.
Mantega said in November that the Fed's policy, known as quantitative easing, is like throwing, "money from a helicopter," and will fail to spur growth. He told reporters on January the US is trying to, "melt the dollar," by buying Treasuries to keep borrowing costs low and spur growth in the world's biggest economy.
"It is sort of ironic, but they don't have too many choices," Jonathan Binder, chief investment officer at Consilium Investment Management in Fort Lauderdale, Florida, said. "Brazil has been intervening in the currency market, and as a result, they end up with a lot of dollars and Treasuries. They are looking from the point of the view that the real is now the most expensive currency out there."
The real is 49 per cent more expensive than its fair value, according to the Economist's Big Mac Index, which compares prices of McDonald's' signature burger across the world.
Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management, has said US debt is a money-losing investment as low interest rates, sluggish growth and a rising debt burden erode returns.
US government debt has gained 3.3 per cent this year and handed investors an average annual return of 5.7 per cent since 2006, according to data compiled by Bank of America Merrill Lynch. Brazil's real-denominated debt has gained 9.1 per cent in dollar terms this year and posted yearly advances of 25.5 per cent since 2006.
The extra yield investors demand to own Brazilian government dollar bonds instead of Treasuries widened five basis points yesterday to 179, according to JPMorgan Chase and Co.
The real fell 0.2 per cent on Thursday to 1.6029 per dollar, reducing its gain this year to 3.6 per cent. Its rally since the end of 2008 is the biggest among emerging-market currencies.
Brazil, China, Russia and other developing countries held about 22 per cent of the $9.7 trillion in marketable Treasuries, according to US government data.
As long as these countries intervene in the market to manage their currencies, their Treasury holdings will keep growing, according to Steven Englander, head of Group-of-10 currency strategy at Citigroup in New York.
"They are taking in a lot of dollars, and it's forced them into the Treasury market," Englander said.
"It's not necessarily you think the Treasuries are of good value. There are not many alternatives."
Protection costs rise for Brazil bonds
The cost of protecting Brazilian bonds against default for five years climbed two basis points to 115, according to data provider CMA, which is owned by CME Group and compiles prices quoted by dealers in the privately negotiated market.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
The yield on interest-rate futures contracts due in January rose one basis point to 12.39 per cent, indicating traders expect the central bank will raise benchmark borrowing costs to 12.75 per cent by then. In the US, the Federal Reserve maintains its benchmark rate in a range of zero to 0.25 per cent.
From / Gulf News