Under Lula, investors demand higher interest rates for Brazilian public bonds due to increased economic risk

The interest on inflation-linked public bonds exceeded 6.5% in 2023, in the accumulated rate for 12 months. One year ago, they were 5.65%.

The data are from Tesouro Direto and can be accessed on this panel.

In practice, it is more expensive for the public sector to finance itself and more attractive to investors who want to be better remunerated.

The Treasury increases the rates to compensate for the risks to the Brazilian economy.

The high profitability of the bonds is associated with President Luiz Inácio Lula da Silva’s (PT) speech.

On Thursday (Feb. 2), the PT again criticized the Central Bank’s (BC) autonomy. He suggested changes after the end of the term of the monetary authority’s president, Roberto Campos Neto.

“Let’s wait for this citizen [Campos Neto] to finish his mandate so we can evaluate what the Independent Central Bank meant”, he declared in an interview with Rede TV!

The DI (interfinancial deposit) future interest rate contracts are rising. Those maturing in January 2025 reached 13.28% on Friday (Feb. 3), compared to 12.66% at the end of 2022.

Those maturing in January 2027 rose from 12.61% to 13.18% this year. They were at 10.97% one year ago. They were at 10.88% one year ago.

Financial market agents attribute the autonomy, sanctioned in 2021, as a milestone to avoid political interference in the Central Bank.

With the operational independence of the monetary authority, they evaluate that monetary policy decisions will be technical, based on the global and domestic economic scenario.

By signaling the change in this rule, the market starts to charge a higher reward for contributing resources: interest.

This more expensive return to investors also has implications for the increase in public debt stock.

In 2022, the consolidated public sector – formed by the Union, states, municipalities, and state-owned companies – paid R$ 586.4 billion, or 5.96% of the GDP (Gross Domestic Product). The accounts had a nominal deficit of R$ 460.4 billion last year.

Lula also showed dissatisfaction with the country’s inflation target, signaling a low level.

The speech creates an expectation of a higher IPCA (National Wide Consumer Price Index) in the future and, consequently, a higher interest rate to control prices.

Other public bonds registered this upward movement in interest rates. The Fixed-Rate Treasury due in 2029 went from 12.81% in December 2022 to 13.41% on Friday (Feb. 3, 2023).

With information from Poder360