[Weekend Money] "Brazilian Bonds: Earn Interest in Dollars Now...Wait for BRL After the Election"

NH Investment & Securities Releases Brazilian Bond Investment Strategy Report

Increased Volatility Expected in the Fourth Quarter Ahead of October Elections

According to analysts in the securities industry, a sound strategy for investing in Brazilian bonds is to earn interest income through dollar-denominated bonds for now and to target Brazilian real (BRL)-denominated bonds after the October elections. With Brazilian President Luiz Inácio Lula da Silva having a high chance of re-election, there are concerns over fiscal policy that could increase volatility in the bond market in the fourth quarter. Therefore, it is advised to buy BRL-denominated bonds when their prices drop.

According to an overseas bond strategy report from NH Investment & Securities released on August 15, despite the Brazilian central bank's policy rate cuts, market interest rates are still maintaining a high level in the 14% range. The main factors cited are: first, heightened global inflationary pressure due to escalating tensions between the United States and Iran; second, concerns over fiscal burdens related to Brazil’s general and presidential elections scheduled for October.

Byungha Jeon, a researcher at NH Investment & Securities, said, "This election is a crucial turning point that will determine Brazil’s future fiscal policy, making it extremely significant for bond investors." He added, "Given that fiscal norms have weakened during this administration, an extension of the current government’s term is likely to be a negative factor for the bond market."

Brazil’s national debt ratio has already exceeded 80%, and in October, the country will simultaneously elect its president, governors, and members of both houses of Congress. Currently, President Lula is widely predicted to secure re-election. Previously, under the Lula administration’s expansionary fiscal policy, the Brazilian central bank halted its interest rate-cutting cycle and was forced to raise rates again in 2024.

Jeon further noted, "Investors who remember the surge in bond yields and market turmoil resulting from fiscal shocks are likely to be wary of President Lula’s victory," adding that, "volatility in the bond market during the fourth quarter will be inevitable."

Accordingly, he recommended focusing on dollar-denominated bonds for now, as they are experiencing relatively lower volatility. Jeon explained, "The value of Brazilian dollar-denominated bonds lies in their relatively low volatility compared to BRL-denominated bonds," and emphasized, "The current combination of a stronger won against the dollar and high interest rates is favorable." It is particularly noteworthy that the KRW-USD exchange rate has fallen significantly recently, strengthening the won, while the yields on Brazilian dollar-denominated bonds have remained relatively elevated.

He stated, "For investors who place importance on tax-exempt benefits, although the absolute interest rates may be somewhat lower, dollar-denominated bonds offer greater stability compared to Brazilian real-denominated bonds, and should be prioritized." He also noted, "Given that it is difficult to expect a rate cut by the US Federal Reserve in the near future, an approach focusing on interest income rather than capital gains is advantageous."

For BRL-denominated bonds, he recommended a "wait-and-see" strategy. It is not too late to invest after observing the election results and the ensuing market responses. If concerns over fiscal policy intensify around the October election and this leads to a sharp rise in bond yields, such a situation could be leveraged as a buying opportunity for undervalued BRL-denominated bonds. Jeon concluded, "It would not be too late to respond after seeing the election outcome and the market’s reaction." He further suggested, "Taking advantage of increased volatility in the fourth quarter as an opportunity to purchase BRL-denominated bonds at low prices appears to be a sound strategy."

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