Uncertainties over fiscal issues and rate hikes in the U.S. lead the market to price more risk; the nominal curve has a similar movement
04/04/2024
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Luciano Telo — Foto: Rogerio Vieira/Valor
In an environment still harboring uncertainties regarding public accounts and worsening external conditions, in the face of a new hike in long-term interest rates in the United States, the market has once again embedded even higher rates in prices. It is in this scenario that the real long-term interest rate, which discounts the impact of inflation and is one of the variables that best reflects investors’ perception of the future, is already at 6%, the highest it has been since the end of October.
Real market interest rates, extracted from inflation-linked bonds (NTN-Bs) for August 2050, rose from 5.47% at the start of the year to 5.93% on Wednesday.
As a result, this is already reflected in the Treasury’s public bond issues. At last Tuesday’s (2) auction, the Treasury sold 150,000 NTN-Bs maturing in 2060 at a rate of 5.9493%, the highest level of the year.
The movement was similar to that seen in nominal interest rates, which once again visited the 11% mark last week. Part of the rise in rates is related to the external movement: real ten-year interest rates in the U.S. rose from 1.74% at the start of the year to precisely 2% at Tuesday’s close. Although it seems insignificant, the change in the level of American interest rates reinforces the feeling that global rates need to be higher.
Data from the U.S. economy continued to show resilience in the first few months of 2024, which put nominal and real interest rates around the world back on an upward trajectory, noted Luciano Telo, the chief investment officer for Brazil at UBS Global Wealth Management. “In the U.S., activity has remained strong and, in the coming months, inflation should continue to fall, but at decreasing rates. Ten-year Treasuries have been the password for aversion to risky assets all over the world. It’s a force that causes nominal and real interest rates around the world to rise.”
“We have to recognize that Brazil cannot reverse this premium in real interest rates with a domestic story,” emphasized Mr. Telo.
“It was a repricing of both nominal and real interest rates,” agreed Miguel Sano, fixed income manager at SulAmérica Investimentos. “The main difference for the rise in these longer rates is the issue of longer-term uncertainties, such as fiscal uncertainties, and the level of international interest rates. These are factors that will count.”
Mr. Sano also points out that American long rates have been at their highest levels since the 2008 financial crisis. “At that time, a long NTN-B oscillated between 6.3% and 7.4%. We’re in a global environment where interest rates are higher. From the point of view of the global investor, if you’re looking at interest rates in various countries at levels that haven’t been seen for 15 years, you have to wonder whether it’s worth putting money in Brazilian, American, or British interest rates. Naturally, the rate here needs to be higher,” he said.
In addition, domestic uncertainties are also cited by Mr. Sano, noting that the Central Bank estimates a neutral real interest rate in Brazil of 4.5%, while much of the market is already working with higher levels. “This creates a limit to the potential gain from a long NTN-B.”
Despite the exogenous component of the increase in American long interest rates, uncertainties related to meeting the fiscal target also play an essential role in the dynamics of NTN-Bs, according to Carlos Eduardo Eichhorn, the director of asset management at Mapfre Investimentos. “The real interest rate curve has already been opening up [rising] over the year, also because the issue comes and goes. We notice that the more medium and long-term part of the real interest rate, which has risen from 5.5% to levels closer to 6%, is even more sensitive and has been rising more than the pre [nominal interest rate] itself,” he noted.
Agents’ distrust of the domestic fiscal issue eased in the short term after more robust federal tax collection data, but it is still present in the long term.
Mr. Eichhorn believes that much of the fiscal debate has already been incorporated into asset prices over the year, and so a rate close to 6% for medium-term real interest rates, such as those extracted from NTN-Bs for 2035, is already proving more interesting for allocation. “We already have a bit of this position, and we’ll probably increase it to 6%,” he said.
According to the executive, if it becomes clear that the parameters established in the fiscal framework by the government will be respected, there could be a reversal of the perception of risk embedded in prices from the beginning of the year to now. “In fact, there will be a bigger discussion point [about the 2024 fiscal target] between May and June, and that could be decisive for this dynamic. Or, if there is an early and stronger signal from the government authorities that there will be no change to the target, we may also see a relief in the curve,” explained Mr. Eichhorn.
Mr. Telo, from UBS Wealth, also believes that, despite some obstacles in the short term, the premiums embedded in real long-term interest rates in Brazil should guarantee good returns further down the line. “If you buy an NTN-B above 5.5% and carry it for four years, the return is higher than the CDI almost 90% of the time. So we see that there is a good premium.”
According to the executive, global investors are not looking at Brazil at the moment, given that Treasuries are still paying very high interest rates. “And domestic institutional investors have also been shy, and we don’t see individuals wanting to add too much risk at the moment. With the CDI rate high and inflation low, real interest rates on the CDI also remain attractive. The market hasn’t found the participant who is going to make this closing movement [fall] in real interest rates,” explained the executive.
According to Felipe Guerra, partner and investment director at Legacy Capital, in a monetary easing cycle, when nominal interest rates cross the 11% level, medium and long-term NTN-Bs tend to perform well. The professional made the comment based on a study prepared by the manager at a Bradesco BBI event on Tuesday (2).
“We’ve already crossed that mark [of 11% nominal interest], but NTN-Bs haven’t done well so far because there’s strong competition with incentivized bonds. When this competition is over, I think NTN-Bs will close 60 basis points [or 0.6 percentage points] above fixed-rate bonds. So, if you have a portfolio of NTN-Bs there will be a time when you’ll make a lot of money,” noted Mr. Guerra.
In Mr. Sano’s view, there may be a more favorable movement for long NTN-Bs further ahead, but shorter papers may perform better. “The rate is interesting and seems less likely to worsen to 6.2% and more likely to fall to 5.5%, for example. Looking ahead, the symmetry becomes more favorable, but if you don’t have cash constraints, a shorter-term instrument may be more guaranteed. In some portfolios, we prefer the NTN-B for 2028,” he said.
*Por Gabriel Roca, Victor Rezende — São Paulo
Source: Valor International