Renato Andrade

Brazil’s local-currency bonds fell, with yields rising the most in five months, on speculation signs Latin America’s biggest economy is improving may lead the central bank to scale back interest-rate cuts.

The yield on the nation’s zero-coupon bonds due January 2010 surged 17 basis points, or 0.17 percentage point, to 9.96 percent at 4:53 p.m. New York time, according to Banco Votorantim. The increase was the biggest since November.

Brazil’s bonds slumped a day after a report showed retail sales climbed for the second straight month in February, suggesting the country’s economic slowdown is easing. The central bank has cut its lending rate twice this year to shore up the economy as the global recession curbs demand for the nation’s commodity exports.

“An economic rebound means a less pronounced monetary policy easing now and increases in interest rates later,” said Roberto Padovani, chief economist at Banco WestLB do Brazil SA in Sao Paulo.

The yield on Brazil’s 2010 bond touched 9.66 percent on April 15, the lowest since the security was issued in October 2007, after Brazil’s Finance Minister Guido Mantega said the government will keep cutting taxes and adopting measures to fuel economic growth.

Brazilian economists forecast the central bank will cut its benchmark lending rate to 10.25 percent from 11.25 percent when it meets April 29, according to a weekly central bank survey published on April 13.

“It’s clear that the next move is a cut; the question is how much,” said Gabriel Levy, an economist at asset-management firm Sparta Administradora de Recursos in Sao Paulo.

Brazil’s central bank President Henrique Meirelles has room to cut the key lending rate by another 1.5 percentage points, Levy said.

Brazil’s Real
The yield on the overnight contract for January 2010, the most-actively traded on the BM&F commodity and futures exchange in Sao Paulo, rose 17 basis points to 9.88 percent.

Brazil’s real slid 1 percent to 2.1952 per U.S. dollar, from 2.1740 yesterday. It has gained 5.4 percent this year, the second-best performance among the world’s 16 most-actively traded currencies after South Africa’s rand.

“We had a strong gain over the last two weeks, and it’s natural to see the real falling after such a rally,” said Mario Paiva, a currency strategist with Rio de Janeiro-based Liquidez Corretora.