Traders turn to inflation-linked Brazilian bonds

(Bloomberg) Bond traders are turning to inflation-linked Brazilian bonds, while the central bank seems willing to slow down the pace of tightening monetary policy, even as price pressures increase around the world.

The country's two-year breakeven, the inflation rate implicit in bond market prices, rose to 6.83%, the highest level in six years, as traders accept the monetary authority's plan to reduce one of the most aggressive adjustment cycles in the world and apply an increase of 100 basis points on Wednesday.

While the war in Ukraine prompted operators to momentarily increase the stakes that the central bank could set aside its guidance, the dull response of officials, who have not spoken publicly since then, reinforced the view that they will stick to the original plan.

Brazil's central bank has been raising borrowing costs since early 2021 to fight rampant inflation, raising the benchmark rate to 10.75% from 2%. At their last meeting in February, officials made the third consecutive 150 basis point hike and showed signs of a smaller increase for the next meeting. Two weeks later, Russia invaded Ukraine, driving up oil prices and causing yields to rise around the world.

The view that the central bank will not bow to an increase in inflationary pressure led traders to revalue the price of swap rates, pushing up the belly and the long end of the curve. Rates on contracts expiring in January 2025 and January 2027 rose 110 and 100 basis points since the beginning of the month.

If officials confirm expectations, traders will focus on the tone of the statement to adjust bets on upcoming decisions. The curve currently discounts an increase of the same magnitude in May, and another 100 basis points in adjustment in the next two meetings that could be divided.

Economists raised projections of increases in the consumer price index to 6.45% from 5.65% this year and 3.7% from 3.51% by 2023, according to the latest central bank survey, after rising oil prices led Brazil's state-owned oil company to raise fuel prices. Although President Jair Bolsonaro's government cut fuel taxes and is seeking additional measures to alleviate the impact on end-consumer prices, any measure is likely to have a major impact on tax accounts, which will also put pressure on swap rates.

Original Note:

Traders Seek Inflation Hedge as Brazil Set to Slow Rate Hikes

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