Brazil’s Government Bond Market: A liquidity mechanism or crowding-out effect?
It is the country that leads the infamous BRICs, coined by Jim O’Neill, Brazil. The 5th largest country in the world now also boasts an almost corresponding, 6th largest economy in the world, recently overtaking the once economic powerhouse, the UK. As far as Latin America is concerned, Brazil is the flesh and blood proof that success stories can come out of a perpetually hopeless case that is Latin America. As recently as November 2011 Standard & Poor’s upgraded sovereign dollar-denominated foreign debts to BBB from BBB- and government’s local currency debt from BBB+ to A- . Renewed hope in the last decade ...view middle of the document...
In order to be able to set the stage for this biggest picture, first we must take a look at where Brazil’s market stands as of now.
A current snapshot
The Brazilian government sold over $825 million in long-dated bonds on a single day in early January with demand so unexpectedly high that the yield for the securities came in at 3.449%, a record low with the bond’s coupon yield at par of 4.875% . Given Brazil’s historically high interests, the buyer’s demand for these bonds made for a historic lows in interest payments for Brazilian foreign debt issued. Brazil has reached a point in the global capital markets where Sovereign US dollar paper issued by them is a go to for investors during volatile times. This shows a turning point in history, or at least financial history, where Brazil’s steady growth together with the low levels of public debt has largely removed the stigma of prior dictatorships, periods of hyperinflation and closed and opaque market conditions. According to the Wall Street Journal’s Credit Markets summary since March of this year, investors have added $18 million to funds that hold debt, mainly issued by Brazilian companies and government agencies meanwhile back in Brazil the currency (real) has depreciated and the BOVESPA has plunged .
In the recent sell-off in emerging markets then, why has Brazil not suffered the same fate? While the Eurozone’s economic woes continue and China’s consistent double digit growth slows to single digits, Brazil’s bond market is considered a steady and relatively safe bet which allows it to enjoy developed country effects of investors flocking to it in hard times (refer to Figure 1 below).
Another, and perhaps more important development of the bond market, is a rise in the sale of reais-denominated government bonds to oversea investors which are not subject to taxes on foreign investment, a recent move that has proven positive in the market. In April of this year Brazil sold 3 billion reais worth of these bonds at yields of 8.6% (currently trading at 7.5%).
Source: "Brazil Debt Seen as Safe Bet: Bond Market Offers Access to the Countr'ys Steady Growth and Low Public Debt." Wall Street Journal [New York] 29 May 2012, US Edition: Credit Markets n. pag. Web. 19 Dec. 2012. http://online.wsj.com/article/SB10001424052702303395604577434412657454798.html
What makes Brazilian special, even as it enjoys this heightened status, are its highly positive nominal and real rates which provide a sharp contrast with emerging Europe and Asia.
Source: JPMorgan, Bloomberg, as of February 28, 2011. EM Global Divesified Index.
Some of the high interest rates can be explained through the huge increased level of subsidized lending to the national development bank, BNDES . The subsidized lending allows BNDES to lend at not the benchmark overnight rate set by the central bank, which stands at about 10% but its own rate of 6%....