Sunday, March 11, 2012

Today's Major Market Move: Brazilian 6 Month Government Bond drops 65 Points MTD

Brazil is currently experiencing some of the highest inflation on the planet and that fact is represented in its sovereign bonds. At the beginning of the month, the 6 month Brazilian government bond was paying out at an APR of 9.48. Compare that to Germany, the U.S., the U.K and Japan were the equivalent bonds were paying out at .09, .12, .4 and .11. As of late however, Brazilian bond rates have dropped noticeably, with the 6 month dropping to 8.91in a little under 2 weeks.

Click here to go to the live table.
For U.S. based investors, the risk of investing in Brazilian bonds (or any foreign bonds for that matter) is a combination of both default and currency risk. Brazil has a debt/gdp of just 41% (source: Wikipedia) which makes default a highly unlikely scenario. Therefore the  bulk of the higher rates is attributable to currency risk . If we look at the performance of the USD / Brazilian Real cross vs the USD / Euro cross going back to the beginning of 2011, the Real has shown a little more volatility but in our opinion the difference is not nearly enough to account for the huge disparity in rates.

Click here to go to the live chart.
One of the distinguishing characteristics of the last 3 years has been the willingness of bond holders of Germany, the U.S., Japan, to accept minuscule rates in the face of rising equities, rising commodities and competitive devaluation. It goes to show that there is a large segment of investors out there that is still expecting significant deflation.

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