Brazilian treasury bonds now pay 10% per year because of heightened risk perceptions

RIO DE JANEIRO, BRAZIL – Fiscal and political uncertainties have dominated the Brazilian market in recent weeks. Investors are concerned about threats to the spending cap, the main pillar of the country’s public finances.

There are new risks, such as the proposal to introduce extended rather than immediate payment of federal judicial debts, and to create a new, topped-up Bolsa Família (aid for the poor) in an election year. There is also growing friction between President Jair Bolsonaro and the Supreme Court (STF), which could lead to an institutional crisis.

This combination of political and fiscal noise has heightened risk perceptions in the country. The result? Investors reassessed assets and began to demand a higher premium to compensate for the scenario.

“Investors are starting to demand more money to lend to the government. This increases the yield of fixed-income assets with market risk, i.e., fixed-income and inflation-indexed assets,” Guilherme Cadonhotto, a fixed-income specialist at Spiti told Exame newspaper.

In August, some government bonds began to generate yields in double digits. The 2026 Treasury Fixed Rate has an annual yield of 9.91%, while the 2026 IPCA Treasury bond offers a yield of 4.53% plus inflation – a total of about 10%. In contrast, the 2031 Treasury bond prefixed with semi-annual interest has an annual yield of 10.57%.

The prices of these assets are inversely correlated with the interest rate. This means that when the interest rate rises, the face value declines in what is known as mark-to-market, which is reflected in the investor’s portfolio. The Treasury prefixed bonds maturing in 2026, for example, saw a 9.28% decline this year.

However, it should be noted that the loss is only effective if the investor chooses to trade the security in the secondary market before maturity. If the asset is held to final maturity, the investor will receive the value promised when the contract was signed. This is the main reason why analysts do not recommend selling these bonds now, despite the decline that appears in the portfolio.

On the contrary, fixed-income specialists recommend buying them.

“The current moment is a good buying opportunity, as it will be tough to find an interest rate around 10% in the next few years. The neutral interest rate is close to 6.5% to 7%. There is no reason why Brazil should have an average interest rate of 10% per year for the next three years, and economic activity will not be among the best,” argues Cadonhotto. He points to the fact that interest rates are expected to fall again as the economy slows.

TIME TO GET IN

On Tuesday, August 24, the interest rate market took a positive course after the Chamber of Deputies president, Arthur Lira, publicly supported the proposal to keep federal “precatórios” [court ordered debt] spending outside the spending ceiling, as advocated by a section of economists. Five-year interest rate futures fell to 9.81%.

However, in the medium term, the fiscal scenario will continue to deteriorate, especially given the expectation of a very volatile election year in 2022, which could further reduce government bond prices and make interest rates increasingly attractive. The recommendation, however, is not to wait.

“No one will find the right entry point. What matters to investors is that they get an attractive nominal interest rate, and that’s what we have now,” says Odilon Costa, digital bond and private credit analyst at BTG Pactual.

The BTG Pactual digital analyst recalls that this window of opportunity has been open for some time for those paying attention. “Our buying indication started back in May, and I believe that the price adjustment movement is already 40% given. However, there is still an exciting premium in some assets,” Costa adds.

This also applies to private debt securities, which, although less liquid than government bonds, also offer good opportunities for investors who want to hold medium- and long-term securities.

In this segment, BTG Pactual digital recommends buying mainly short- and medium-term securities with a maturity of up to five years. The analysis notes that the recent SELIC interest rate hikes are not yet priced into these assets.

However, the window of opportunity should not last long. Analysts reiterate that current interest rates are unlikely to be available until the end of the year, which means that the yield offered at maturity will be lower.