Growing uncertainties both at home and abroad put the Brazilian bond market in caution mode. Such environment led the National Treasury to restrict the size of auctions of both pre-fixed and inflation-linked debt securities. It is a response not only to the smaller investor demand for bonds carrying a higher risk, but a conservative strategy of the Treasury itself to avoid paying higher premiums without need. This strategy will be put to the test on April 27, when a new offering of short- and long-term pre-fixed securities will be held.
Last week, the traditional auctions of government bonds already brought lots considered small. They sold 6 million LTNs, securities that pay a pre-fixed rate, down from 9 million offered in the prior auction. In the case of NTN-Bs, securities that pay interest plus the variation of the Extended Consumer Price Index (IPCA), the lot of 750,000 notes was the lowest offering since December.
In addition to the market discomfort of taking the risk of pre-fixed rate, some uncertainty about the effect of the sharp deceleration of inflation also weighs down NTN-Bs. Experts consider that this debt is still attractive, but this may not be the best moment to increase exposure to it.
In the local scene, the main uncertainty revolves around votes on the pension reform and possible demonstrations against the new rules. The proposal will be submitted to vote by the special committee of the Chamber of Deputies on May 2, one day after celebrations for the Brazilian Labor Day.
On the 25th of April, the decision of the Brazilian Socialist Party (PSB), party of the governing base, of closing ranks against the pension reform added to the anxiety. Even though the party only has 35 deputies, the fear is that other allies may follow the move.
Abroad, events including France’s election or the tensions involving North Korea make financial players adopt caution. “It is always difficult to weigh in the political risks, which now came with force,” says Christiano Clemente, with Verus Gestão de Patrimônio. “When we put in perspective what these events may mean for asset prices and returns over the year, it is natural to adopt a more defensive stance.”
Mr. Clemente says, however, that the reduction of auctions may be linked more to a conservative stance by the Treasury than to a matter of attractiveness of the assets. In times of uncertainty, investors may demand an additional premium for the bonds. On the other hand, the offering of securities itself may end up putting pressure on interest rates on the futures market.
Guilherme Foureaux, partner and manager at MRJ Marejo Investimentos, says the real interest paid by the NTN-B remains high, above 5%. In his opinion, the rate doesn’t fall below that level precisely because the market is still awaiting, with caution, the passage of the pension reform. “There is a risk of greater softening of the proposal and the market becomes more cautious,” he says.
This also includes the more conservative position of the Central Bank (BC), Mr. Foureaux says. “In general, with the exception of January, the BC has been opting for the most moderate cut among the bets that resound on the market,” he adds.
Mr. Foureaux also sees that the demand for bonds in the Treasury auctions has been positive, with rates “closing” even more than those of the interbank deposits (DI). “When the Treasury reduces the lot, the rate closes. There may be some repressed demand too,” he says.
The MRJ asset manager reckons that inflation falling more rapidly than interest has been hurting NTN-Bs carrying value. While investor demand hasn’t been hurt yet, potential gains from inflation-linked bonds are issuing initial signs of weakness.
Experts say the narrowing of the difference between current data and inflation expectation reduces the size of these bonds’ carrying value, that is, their future yield. The effect on the secondary market was felt more in the yields of shorter-term securities.
“The shorter-term securities were greatly hurt with the drops in inflation expectation and the series of downward surprises of the monthly IPCA,” Pedro Barbosa, bond strategist at Renascença, says. He points out that this was the case of the NTN-B of May 2017, which had return of 2.9%, only 80% of the CDI, the benchmark short-term rate.
Vitor Carvalho, partner and manager at Laic-HFM Gestão de Recursos, says inflation fell sharply since the middle of last year and advanced most of the path expected for the next few months. “Thinking of the carrying value, there is less advantage of positioning on such a security now,” he says.
Another adjustment that has already been largely made has to do with the monetary policy, reducing the room for big bets. Mr. Carvalho says that the “yield curve is well priced and there are no bid directional bets now.” “Everything is very well arbitrated in the Selic [policy rate] cuts. This type of gain would depend on the sharper closing of the rate and return on top of marking to market,” he adds.
In medium and long terms, starting in 2020, the appetite for NTN-Bs remained firm, Mr. Barbosa, with Renascença, says. “The dynamic of trading and expectation of return of these securities are less subject to the benign surprises of inflation that we have been seeing since mid-2016,” he says. In his opinion, taking position in these assets also brings the positive expectation about adjustments of the economy, which may put the structural rate at a lower level.
Source: Valor Econômico