Brazil Yields Rise on New US Tariffs

Brazil's 10-year government bond yield rose to 14.54% in mid-July from 14.43% earlier in the month after the US announced a new 25% tariff on Brazilian imports, effective July 22th. The move fueled concerns that trade tensions could weigh on economic growth, raise uncertainty, and pressure Brazil's fiscal and inflation outlook, prompting investors to demand higher yields. The increase also came amid persistent external risks, including geopolitical tensions and volatility in international oil prices. Meanwhile, the BCB raised its inflation forecast for the fourth quarter of 2027 to 3.7% from 3.5% and highlighted new upside risks, including climate-related pressures on food and energy prices and fiscal stimulus measures that could strengthen domestic demand. At the same time, a rebound in US Treasury yields supported global bond markets.

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.