Interest Rate Futures

Brazil Rate Futures Rise on Increased Central Bank CPI Forecasts

Yields on most Brazilian interest- rate futures contracts rose after policy makers signaled that a fifth interest rate increase this year won’t be enough to slow inflation to its 4.5 percent target in 2012.

The yield on the contract due in January, the most-traded today in Sao Paulo, increased three basis points, or 0.03 percentage point, to 12.44 percent at 5 p.m. New York time. The yield on the contract due in January 2013, the second-most traded, widened four basis points to 12.59 percent.

The real gained for a third straight day, strengthening 0.5 percent to 1.5677 percent per U.S. dollar , from 1.5759 yesterday. Earlier in the day the currency rose to 1.5667, the highest level in two months. It reached 1.5656 on April 29.

Brazil ’s central bank forecast in its quarterly inflation report today that consumer prices would rise 4.9 percent in 2012 and slow to target in the second quarter of 2013 if it increases the benchmark interest rate in July to 12.50 percent and the real weakens. Policy makers estimated in March that inflation, which ran at 6.55 percent in the 12 months through May, would slow to 4.6 percent by the end of next year, under the so-called market scenario.

“The central bank’s projections increased from the last report,” Luciano Rostagno , the chief strategist at Sao Paulo- based CM Capital Markets, said by telephone from Sao Paulo. “The market sees the possibility that the bank will go beyond 12.5 percent.”

12.25 Percent

Policy makers led by central bank President Alexandre Tombini have raised benchmark borrowing costs four times this year by a total of 1.5 percentage points to 12.25 percent in order to tame inflation which is above the ceiling of the central bank’s target range of 4.5 percent, plus or minus two percentage points.

Traders, who expect the central bank to increase the Selic by a quarter point to 12.50 percent at its July meeting, are split whether policy makers will raise again in August or pause, according to Bloomberg estimates based on interest rate futures.

Policy makers today forecast in all three inflation outlooks -- the reference, the market and the alternative scenarios -- that consumer prices will only meet the target in the second quarter of 2013.

The central bank slowed the pace of interest-rate increases to a quarter point in April, after half-point increases at its two previous meetings.

Policy makers also said they twice bought dollars in the spot currency market today, first at 1.5694 reais and then at 1.5713 each. The purchases are part of an effort by policy makers to curb the currency’s 25-percent rally over two years.

interest rate futures, central bank policies, cash treasuries and ...

While the zero or near-zero interest rate policies of central banks around the developed world are continuing, trading of active cash treasuries and their corresponding futures products remains active and interest-rate futures markets both in the U.S. and Europe continue to grow and to add new products and new competition, according to a new study by the Aite Group, a financial industry research and advisory firm.

Aite reports that in 2010 the overall trading volume in global interest-rate futures returned to near pre-crash levels of over 3 billion contracts, not seen since September 2008.

There is also more competition in the market.

In the U.S., interest-rate futures trading is dominated by CME Group, which bought the Chicago Board of Trade in 2007, with its clearinghouse controlling some 95% of the open interest in the interest rate futures sector.

But CME is facing competition from both ELX Futures, which hits its two-year anniversary this July, and NYSE LIFFE U.S., which launched Eurodollar and Treasury futures trading this year.

In Europe, a major development according to Aite is a new combined Eurex/NYSE LIFFE exchange which will kick off operation once the merger of NYSE Euronext and the Deutsche Bourse is finalized. 

As the Aite report notes, this merger will bring the European interest-rate futures market full circle, since the Eurex had been “wrestling liquidity away” from the LIFFE exchange’s German interest rate futures business and now the two former rivals will be one.

Primary participants in the U.S. interest-rate futures market are proprietary trading firms based in Chicago, followed by the major broker/dealers and banks that use the markets to augment their market-making activities in the cash and OTC derivatives markets. Also in the market are hedge funds and managed fund businesses, as well as asset managers, bond funds and pension funds.

Over the past year there have been a number of new products introduced in this market including Ultra T-bond futures, launched in January 2010, which have a 25-year maturity, substantially longer than the original 15-year-maturity T-Bond contract; On-The-Run Treasury Futures, designed to let customers gain exposure to the most recently auctioned Treasury securities in the two-year, five-year and 10-year sectors and Weekly Treasury Options on Treasury futures, introduced in January of this year, which expire every Friday that is not already a quarterly option expiration date.

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