Brazil Bond Yields Ease on Soft CPI

Brazil's 10-year government bond yield fell to 14.43% in July from 14.54% a week earlier after inflation data came in below expectations. Annual inflation eased to 4.64% in June from 4.72% in May, below market forecasts of 4.80%, bringing it closer to the BCB's target range of 1.5%-4.5%. The softer inflation reading reinforced expectations that the central bank could adopt a more dovish stance. Meanwhile, oil prices retreated on signs that diplomatic efforts between the US and Iran remain on track despite recent tensions, easing energy-driven inflation concerns. At the same time, formal job creation slowed to about 73,000 positions in May, well below forecasts of 115,000, pointing to a gradual cooling in the labor market.

Brazil's 10-year government bond yield rose to 14.6% in July as a fragile fiscal backdrop heightened concerns over the country's public finances. Gross public debt climbed to 81.1% of GDP in May, above market expectations of 80.7%, while the primary deficit widened to R$56.1 billion, exceeding forecasts of a R$53.5 billion shortfall. The deterioration in fiscal accounts reinforced expectations that borrowing costs could remain elevated. Political developments also weighed, as an AtlasIntel/Bloomberg survey showed President Lula holding a 6.5-point lead over Flávio Bolsonaro in a hypothetical runoff, reinforcing expectations of a more expansionary fiscal stance. Meanwhile, annual inflation rose above the central bank's upper tolerance limit to exceed 4.8% in the first half of June. Offsetting some of the pressure, formal job creation slowed to about 73,000 positions in May, below forecasts of 115,000, pointing to a gradual cooling in the labor market.

Brazil’s 10-year government bond yield edged down to 14.4% in late June after the release of the minutes from the latest Copom meeting, in which the benchmark Selic rate was cut by 25 basis points to 14.25% per year. The view that Copom left the door open for further Selic cuts helped ease the Brazilian yield curve. Still, the minutes struck a slightly more hawkish tone than the initial statement, explicitly describing the inflation risk balance as asymmetric and tilted to the upside. Meanwhile, the US Federal Reserve adopted a more hawkish stance at its latest meeting, with policymakers signaling additional rate hikes by December. The shift led investors to scale back expectations for monetary easing, limiting the decline in bond yields.