Q: How is liquidity in general in the Brazilian sovereign fixed income market?Posch:
The Brazilian fixed income market is relatively large and liquid for an EM country.In November, for example, one of the most recent months for which data are available,there was just under 7 billion Brazilian real (BRL), or 3.8 billion U.S. dollars, in turnoverper day for fixed rate bonds. That trading was largely concentrated in the short end of thecurve. In the same month, another 1.4 billion real per day traded in inflation-linked bonds,according to the Brazilian Treasury. Brazil provides additional liquidity through regularbuyback and debt swap auctions and is improving access for individual investors throughthe Tesouro Direto program (which allows residents in Brazil to buy government bondsthrough the internet).
Q: What is PIMCO’s view on local Brazilian corporate bonds?Posch:
The market for locally issued corporate debt in Brazil remains underdeveloped.To a large extent, this is simply because interest rates in Brazil are still high, making itvery expensive for local corporations to leverage themselves domestically.Corporations often find it more attractive to raise capital abroad or by selling equity, asillustrated by the large number of initial public offerings in the last several years. WhilePIMCO expects interest rates to decline in the long run, the rate situation is not likely tochange in 2010, when, if anything, the overnight rate is expected to go up, not down.Corporate credit in Brazil’s local fixed income markets would be more attractive if therewas more liquidity for most issues. Currently, the best values are in primary issues, ratherthan the secondary market, but since most international fixed income investors are activemanagers, the lack of liquidity makes buying local corporate debt a difficult proposition. Inaddition, foreign investors need to take the 15% withholding tax into account.Since local corporate bonds are currently trading with only a small premium to thesovereign curve – and because of the potential credit, liquidity and interest rate risk aswell as the aforementioned tax issues – we don’t think it makes sense for either local orforeign investors to get aggressively involved. PIMCO has been focusing on names onthe defensive side of industry. These bonds tend to have lower durations and lessinterest rate sensitivity.
Q: Are the new infrastructure projects in Brazil creating investment opportunities?Posch:
Absolutely. Proactive public policies and strong support for expansion ofinfrastructure studies and projects are at the core of Brazil’s plans to boost growth. In thepast year, the Brazilian government has placed particular emphasis on public works as ameans to offset the effects of the global economic recession.Numbers also help to tell the story: Over the last several years, investment ininfrastructure has increased by 12 billion real to 75 billion real in 2009. Such investmentshould reach 100 billion real by 2011, independent forecasters suggest. Another 550billion real should flow from the public and private sectors from 2010 to 2014, accordingto these forecasts and project commitments. This includes transportation infrastructure ofnearly 400 billion real. An additional 136 billion real is projected for the energyinfrastructure sector. Water infrastructure projects, including sanitation, are expected toaccount for approximately 22 billion real during this period.