(Bloomberg) — Bond traders are flocking to Brazilian inflation-linked bonds, while the central bank appears poised to slow the pace of monetary policy tightening, even as price pressures mount across the globe. world .
The country’s two-year breakeven, the rate of inflation implied by bond market prices, rose to 6.83%, the highest level in six years, as traders accept the monetary authority’s plan to cut one of the world’s most aggressive tightening cycles and apply a 100 basis point hike on Wednesday.
While the war in Ukraine prompted traders to momentarily raise bets that the central bank might drop its guidance, the muted response from officials, who have not spoken publicly since then, reinforced the view that they retain the original plans.
Brazil’s central bank has been raising borrowing costs since early 2021 to fight runaway 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 hinted at a smaller increase for the next meeting. Two weeks later, Russia invaded Ukraine, driving up oil prices and causing a surge in spectacles around the world.
Views that the central bank will not bow to rising inflationary pressure prompted traders to reprice swap rates, pushing up the belly and the long end of the curve. Rates on contracts due in January 2025 and January 2027 have risen 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 split.
Economists raised projections for increases in the consumer price index to 6.45% from 5.65% for this year and to 3.7% from 3.51% for 2023, according to the latest central bank survey, after rising oil prices led aa the Brazilian state oil company to raise fuel prices. Although the government of President Jair Bolsonaro lowered fuel taxes and is seeking additional measures to alleviate the impact on prices for the final consumer, any measure is likely to have a large impact on the fiscal accounts, which will also put pressure on swap rates.
Traders seek inflation hedge as Brazil prepares to taper rate hikes
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