By Alex Nicholson and Andre Soliani
June 10 (Bloomberg) -- Russia and Brazil, seeking to reduce their dependence on the dollar, announced plans to buy $20 billion of bonds from the International Monetary Fund and diversify foreign-currency reserves.
Russia’s central bank said it may cut investments in U.S. Treasuries, currently valued at as much as $140 billion, a week after China said it may reduce reliance on the dollar and American bonds. Brazil’s Finance Minister Guido Mantega said his country will purchase $10 billion of debt sold by the IMF, China will buy $50 billion and India may announce similar funding.
Treasury yields climbed this year and the dollar fell in part on concern that foreign central banks would reduce holdings of U.S. financial assets just as America sells a record amount of debt to finance a growing budget deficit and pull the economy from the deepest recession since the 1930s. Treasuries fell today, six days before officials from the so-called BRIC nations meet in Yekaterinburg, Russia, where they plan to discuss the status of the dollar as the world’s reserve currency.
“The bigger picture is people are worried there are too many Treasuries, and that no one is even making a pretense of getting the fiscal deficit under control,” said Francis Beddington, co-founder of Insparo Asset Management, which oversees about $140 million in London.
The U.S. budget deficit is projected to reach $1.75 trillion in the year ending Sept. 30 from last year’s $455 billion, the Congressional Budget Office says.
Rising Yields
The yield on the benchmark 10-year Treasury note rose to the highest level since October, climbing as high as 3.99 percent. It increased eight basis points, or 0.08 percentage point, to 3.94 percent as of 4:17 p.m. in New York, according to BGCantor Market Data.
Bond investors drove up the yield, which helps to set rates on everything from mortgages to corporate bonds, from the record low of 2.035 percent in December. The rate is still below the average of 6.49 percent over the past 25 years, and may stay below 4 percent through at least the first quarter of 2010, the median estimate of 57 economists surveyed by Bloomberg shows.
The spread between 2- and 10-year Treasuries, which reached a record 2.81 percentage points this month, averaged 0.69 percentage points during the fiscal year 2001. During the four- year period of government budget surpluses from 1998 through 2001, the spread averaged 0.22 percentage points.
Record Sales
Treasury Secretary Timothy Geithner said in Beijing on June 2 there will be enough demand for record sales of U.S. debt. He met with Chinese officials after Premier Wen Jiabao called in March for the U.S. “to guarantee the safety of China’s assets” and central bank Governor Zhou Xiaochuan proposed a new global currency to reduce reliance on the dollar.
The IMF’s board may consider in late June or July a proposal for the Washington-based lender to issue bonds, the fund’s spokeswoman Conny Lotze said today. The IMF probably will sell the bonds only to member states and central banks.
The debt will pay a yield similar to U.S. Treasuries and will be denominated in the fund’s basket of currencies, known as Special Drawing Rights, Mantega said at a press conference in Brasilia. The IMF calculates the value of SDRs daily, with 44 percent weighted towards the dollar, 34 percent to the euro and the remainder split between the yen and the pound, according to its Web site.
Brazil’s central bank will decide which assets to sell from its reserve portfolio to free up the funds needed to purchase the IMF securities, Mantega said. Brazil’s reserves totaled $204.6 billion as of June 8, according to data compiled by Bloomberg.
“This is an investment that Brazil is doing with part of its reserves and making available financing so that the IMF may help emerging countries, especially developing countries which face today a shortage of capital because of the global financial crisis,” Mantega said.
‘Window of Opportunity’
Alexei Ulyukayev, first deputy chairman of Bank Rossii, said today Russia will cut the share of U.S. Treasuries “because a window of opportunity for working with other instruments is opening,” according to Interfax news wire. Russia may also place more of the reserves in deposits with foreign banks, he said. The remarks were confirmed by a Bank Rossii official who declined to be named, citing bank policy.
Russia’s reserves totaled $401.1 billion as of May 25, Bloomberg data show. Adarsh Kishore, India’s representative at the IMF, wasn’t available to take phone calls and didn’t respond to an e-mail message seeking comments.
The IMF, which has rescued economies from Pakistan to Iceland in the past year, has never issued bonds and is seeking more cash to finance loans and aid to member countries during the worst economic slump in the fund’s 64-year history. IMF securities would give countries a different way to contribute to the fund and, unlike traditional bonds, would pay an interest rate pegged to SDRs.
‘Signal’
Plans by Brazil, Russia, India and China, the world’s biggest emerging economies, to buy IMF debt isn’t “a dramatic reallocation of resources,” said Joydeep Mukherji, a sovereign risk analyst at Standard & Poor’s in New York. “‘It’s a signal that instead of needing help it’s providing funding. It’s a sign of political support for the IMF. It’s a statement to the world and their own people, a signal that the world has changed.”
Today’s announcements reiterate comments made earlier by the governments that they are interested in buying IMF debt. China is “actively” considering buying as much as $50 billion of the IMF bonds, the State Administration of Foreign Exchange said last week. Finance Minister Alexei Kudrin said on May 26 Russia will buy $10 billion of IMF bonds from the reserves.
‘Smoothly’
Maxim Oreshkin, head of research at OAO Rosbank in Moscow, said the shift into IMF debt won’t happen immediately.
“The central bank has never stood out for making fast moves with its reserves,” Oreshkin said. “If it changes certain groups it will happen smoothly.” Investing in the IMF may bring “political dividends” for Russia as it “raises the role of Russia in the IMF,” Oreshkin said.
Still, Brazil, Russia, India and China, the world’s biggest emerging economies, increased foreign reserves by more than $60 billion last month to limit currency gains as the first global recession since World War II restricted exports, data compiled by central banks and strategists show. Russia added the most foreign exchange since July.
Dollar’s Future
President Dmitry Medvedev questioned the U.S. dollar’s future as a global reserve currency last week and said that using a mix of regional currencies would make the world economy more stable. He renewed his call for consideration of a supranational currency to challenge the dollar.
Brazil’s decision to buy IMF debt isn’t aimed at weakening the dollar versus the Brazilian real, Mantega said.
“For us, there is no interest in weakening the dollar, because when the dollar weakens the real gets stronger and when the real get stronger the exchange rate trips our exports up a bit,” he said. “What we really want is that other currencies are also behind international transactions.”
The Brazilian real is up 19 percent against the dollar the past three months while the ruble has gained 13 percent.
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