Review of prices following more conservative tone in the U.S. monetary policy opened opportunities in inflation-indexed bonds
04/30/2024
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Luciano Telo — Foto: Rogerio Vieira/Valor
The sharp movements in interest rates on U.S. Treasury bonds in April led to a review of prices worldwide. In Brazil, that translated into higher premiums for fixed-income investments. Tesouro IPCA+, an inflation-indexed National Treasury note, is once again yielding 6% above inflation, while long-term, fixed-rates bonds are at 12%, compared to the 10.75% per year of the Selic policy interest rate. As the U.S. Federal Reserve delays its monetary easing cycle, these securities appear in the main recommendations by market experts for May. As a result, a more consistent performance has been delayed in the stock market and other risk assets.
Until Monday (29), the benchmark stock index Ibovespa had lost 0.6%, while the small caps index fell 5.8%. The dollar appreciated nearly 2% against the real. All fixed-income indices were below the month’s CDI (the interbank deposit rate, used as an investment benchmark in Brazil). Year to date, the best result was seen at IMA-B 5, comprised of inflation-indexed Treasury bonds maturing in up to five years, which is up 2%, compared to 3.5% for the reference rate. So far, floating-rate bonds offer the best return free of credit risk. ANBIMA’s debenture index is up 4.7%. The index by the Brazilian Financial and Capital Markets Association is comprised of securities linked to the CDI.
At the beginning of the year, the market expected that the Fed could start its interest rate reduction cycle in June. However, reality set in, as the U.S. economy has shown a stronger-than-anticipated performance driven by hefty consumption and a tight job market, according to Luciano Telo, chief investment officer for Brazil at UBS Global Wealth Management.
April marked the recalibration of expectations, with consequences for assets in general. “The scenario points to high interest rates for longer and stronger activity. It’s now possible that we won’t see any cuts or just one or two ahead,” said Mr. Telo. In light of the market, the executive says that, as long as U.S. Treasury bond rates remain attractive, other assets are unlikely to take off.
He points out that, under last week’s pressure, 10-year U.S. Treasuries rates hit 4.6%, a level seen on September 2023, before the Fed changed its statement to indicate a more easing stance starting in November. “To bet on interest rate cuts again, we need to see a sequence of data that could bring more confidence to the market and the Fed, a more prolonged sequence of inflation moving into a favorable territory,” he said.
The expected reaction in Brazil, also driven by a looser fiscal target, is that the Selic will now fall by 25 basis points at the next meeting of the Monetary Policy Committee (COPOM), a slower pace than the 50-bp cuts seen recently. “Concern arose in the market that, if Brazil started to cut its interest rates at a faster pace than the rest of the world, of 50 bp, the lack of synchronization could appear in the foreign exchange, removing the [larger] spread of rates,” said Mr. Telo.
According to him, there would be room for further cuts, but the Central Bank will look at interest rates globally and the Fed’s signals. “Therefore, the timing of cuts in Brazil may hinge on what happens abroad.”
Although the most recent inflation figures came in line with market expectations, a single-digit Selic is unlike in the short term.
In this environment, many asset classes are favored by spreads, and less to capture capital gains, he says. That is the case with fixed-rate and inflation-indexed bonds. The higher opportunity cost also works to delay a more solid recovery for the stock market. “Part of the market’s perspective was that, as interest rates fell, the appetite for risk in the domestic portfolio could increase. However, prolonged high real interest rates delay a pronounced bet on stocks.”
The price of National Treasury notes series B (NTN-B or Tesouro IPCA+) indicating rates above 6% and fixed-rate three-year bonds reaching 11% is considered attractive from a historical perspective, the UBS executive adds.
For Mr. Telo, it will take at least two or three weeks of less volatility in U.S. Treasuries—a performance based on macroeconomic data—to create a more encouraging scenario for placing risk in investor portfolios.
The recent increase in future interest rates in Brazil opened an opportunity to expand exposure to fixed-rate public bonds, the National Treasury Bills, said Luís Augusto Barone, partner and director at Galapagos Wealth Management.
“The premium rose way beyond the news would suggest. I usually say investors should spend only 20% of their time in fixed-rate securities. Only a few times will the bond market give enough return, and now is one of these times.”
His current recommendation is towards securities maturing in three years. On Monday (29), among Treasury notes, the LTN maturing in 2027 paid 10.78% per year, compared to the current 10.75% for the Selic. If the rate decreases at least another 0.50 percentage points, there would be a gain to be captured over the CDI just with the appreciation of the securities. “There is a premium, it makes sense to allocate 5% to 8% of the portfolio,” Mr. Barone said.
The executive points out that inflation data allows the Central Bank to maintain the roadmap to reduce the Selic by 50 bp at the next COPOM meeting.
On the stock market, the recommendation has been to allocate up to 5% of the portfolio, but investors resist. According to Mr. Barone, investors have been spoiled by the net interest rate spread and expect a big check every month. “They are very risk averse,” he said.
In the high-income retail banking segment, the main position is in credit, which responds to 60% to 70% of the portfolio, depending on the firm’s profile. “A tax-exempt bond is a bad incentive for Brazil,” Mr. Barone acknowledges. He expects the long-term trend for the net interest rate spread over public bonds to fall, with an increased demand for such securities.
The changes in the speech by Fed Chair Jerome Powell have increased investors’ willingness to take risks globally, with the United States acting as a major attractor of funds for bonds or the stock market, said Alexandre Silverio, founding partner and chief executive at Tenax Capital. “The Fed rate at 5.25% with the two-year rate near 5% is a high interest rate. That attracts capital from all over the world. We rely on the Fed’s decision.”
In this environment, the hypothesis of the Selic rate at 9% with the foreign exchange at R$4.8 per dollar is now ruled out. “The scenario has changed. A stronger U.S. economy points to a stronger dollar, which pressures the real, not to mention domestic issues, with fiscal discussions ahead”, the asset manager says. “The Central Bank will have to balance. The higher exchange rate [in Brazil] could hit inflation.”
Still, Mr. Silverio sees room for the COPOM to reduce the policy rate at least three more times, by 25 bp each. “Let’s see where the foreign exchange ends up, it’s a key variable.”
The COPOM will meet again next week, with new inflation data and a Fed meeting on the table—the Federal Open Market Committee (FOMC) meets on Wednesday (1). The executive holds positions in shorter-term bonds in Brazil, believing that there is a little more room for the Selic to fall than the market assumes in its current prices.
On the stock market, at least in the macro multimarket, his choice was to have no exposure.
*Por Adriana Cotias — São Paulo
Source: Valor International