By Renato Andrade

Brazilian local bonds advanced, sending benchmark yields to the lowest in at least 19 months, as a rally in the real beyond 2 per dollar boosted speculation that inflation will ease in Latin America’s largest economy.

The yield on bonds due January 2010 dropped as much as seven basis points, or 0.07 percentage point, to 9.26 percent, the lowest since the securities began trading in October 2007, as traders stepped up bets that slowing inflation will prompt the central bank to keep trimming interest rates. The currency climbed to as much as 1.9972 reais per dollar, marking the first time it traded beyond 2 reais since Oct. 3.

“The currency gain reduces inflationary risks even more, which gives the central bank more confidence to cut interest rates further,” said Roberto Padovani, chief Brazil economist at Banco WestLB in Sao Paulo.

The currency has gained 20.3 percent since March 2, the biggest advance among the six-most traded currencies in Latin America, as prices of the country’s commodity exports rebounded and investor demand for emerging-market assets picked up. It’s up 13.7 percent this year, more than all of the 16 major currencies except the South African rand.

“In a world with low yields and where rates continue to push towards zero on massive liquidity injections, the market remains hungry for primary local market securities where yields are significantly higher than average,” said Dustin Reid, director of currency strategy in Chicago at RBS Securities Inc. “The real is benefiting off of this.”

Record-Low Rate

The central bank reduced the benchmark lending rate to a record low of 10.25 percent on April 29 in a bid to revive growth after the global credit crisis caused a fourth-quarter contraction. While the rate is the lowest on record in Brazil, it remains 10 percentage points above the benchmark rate in the U.S. and 9 points above the European Central Bank’s key rate.

Economists forecast Brazilian policy makers will cut their benchmark rate to 9 percent by year-end, according to a weekly central bank survey published on May 25.

Inflation will slow to 4.3 percent by year-end, below the government’s 4.5 percent target, from 5.5 percent in April, according to the median estimate in a central bank survey of about 100 economists.

The central bank bought $2.4 billion in the currency market in the month through May 22 in an effort to stem the currency’s advance and build up foreign reserves. The bank said in a statement yesterday it will disclose the amount it buys and sells in the currency market on a weekly basis to increase “transparency.”

The dollar purchases pushed the real down to 2.0378 per dollar by 4:50 p.m. New York time.

Farmers’ Profits

“If the central bank does not step up the amount of dollars it’s purchasing in the market, the real will remain beyond the 2 per dollar level,” said Francisco Carvalho, head of currency trading in Sao Paulo at Liquidez Corretora.

Agriculture Minister Reinhold Stephanes said today that farmers’ profits will be hurt if the real remains stronger than 2 per dollar.

“Below that mark, it will start causing trouble for farmers,” Stephanes told reporters in Brasilia before a meeting with Finance Minister Guido Mantega.

The real broke through 2 per dollar a week after central bank president Henrique Meirelles cautioned investors not to load up on bets on the real as signs an “excess of euphoria” is building on the pace of the country’s economic recovery.

Companies including Sadia SA, the poultry exporter that was acquired by rival Perdigao SA, and Votorantim Participacoes SA booked losses on currency derivatives in the second half after the global crisis pushed the real down 32 percent from a nine- year high in the last five months of 2008.

Goldman Sachs Group Inc. today cut its profit forecasts for Vale SA, the world’s largest iron-ore miner, on concern the stronger Brazilian currency will hurt earnings.