Brazil Yields Fall Ahead of BCB Meeting

Brazil's 10-year government bond yield fell to 14.55% from a nearly three-month high of 15% reached in late July as easing tensions in the Middle East pushed oil prices lower, reducing inflation concerns. Iran signaled progress in negotiations to restore shipping through the Strait of Hormuz after US President Donald Trump called off a planned strike, raising hopes for a diplomatic resolution. The decline in oil prices reinforced expectations that the BCB will cut the Selic rate from 14.25% at its August 5th meeting. The latest Focus Survey lowered the 2026 inflation forecast to 5.03% from 5.12% and reduced the year-end Selic projection to 13.75% from 14.00%. Meanwhile, mid-month annual inflation fell to 4.52% in July, from 4.80% in June, below forecasts of 4.67%.

Brazil's 10-year government bond yield rose slightly to 14.81% after touching 14.79% on July 29th, as investors digested stronger-than-expected labor market data and the Federal Reserve’s policy decision. Brazil created a net 145,161 formal jobs in June, above market expectations of 115,000, reinforcing labor market resilience and supporting expectations for a more hawkish BCB. In June, the BCB lowered the Selic rate from 14.50% to 14.25% but highlighted that a resilient labor market continues to fuel services inflation. The Fed kept interest rates unchanged, as expected, though three FOMC members favored a rate hike, raising concerns that global rates may remain higher for longer. The Copom will meet on August 4-5th to decide the next Selic rate level. Meanwhile, signals of increased deficit spending by the federal government added to fiscal concerns, while government revenues faced pressure from new US tariffs.

Brazil's 10-year government bond yield rose above 14.75% in late July from 14.54% earlier in the month, amid the outlook of higher interest rates and the outlook of greater bond supply. Oil, natural gas, soybeans, and power prices rose on the wholesale market as new strikes between Iran and the US tempered hopes that energy supply from the Middle East would restart. The developments supported an outlook that inflation could regain traction and prevent the Brazilian central bank from easing rates in the upcoming quarters, lifting yields domestically. Meanwhile, signals of higher deficit spending from the federal government added to a deteriorating fiscal situation. The latest data showed that the nominal budget deficit widened more than expected to BRL 164 billion. Consistently, government revenues were hampered by fresh tariffs from the United States.