Brazil Yields Fall on Tighter Election Race Prospects

Brazil’s 10-year government bond yield fell to 14.7% from the near one-month high reached on August 14, supported by expectations of a tighter presidential race and broad-based weakness in the US dollar. Financial markets view Senator Flávio Bolsonaro as more fiscally restrictive than President Lula, particularly as elevated domestic yields continue to weigh on economic activity. Recent developments, including an investigation into leaks involving Lula’s son and signs that Flávio is narrowing the gap with Lula in potential runoff scenarios, have fueled expectations of a possible change in government and economic policy. On Monday, a BTG/Nexus poll showed Lula and Flávio in a technical tie in a potential runoff. The weaker dollar also provided a more favorable global backdrop for Brazilian fixed income. However, US Treasury yields remained elevated despite the Treasury raising the limit on long-term bond buyback operations.

Brazil’s 10-year government bond yield rose to 14.9% in mid-August, nearing a one-month high following a rise in US Treasury yields. US Treasury yields increased amid elevated inflation expectations. Worsening risk perception as Brazil’s October presidential election approaches also contributed to the rise, with markets pricing in uncertainty surrounding the next government and its economic agenda. Concerns that the next government could face difficulties implementing a consistent fiscal adjustment are beginning to translate into a higher risk premium in asset prices. Fiscal concerns persist amid signals of higher government spending and pressure on revenues from new US tariffs. Meanwhile, the Copom signaled a cautious approach to further interest rate cuts. Brazil also created a net 145,161 formal jobs in June, well above expectations for 115,000, reinforcing labor market resilience and supporting expectations that interest rates will remain restrictive.

Brazil's 10-year government bond yield rose to 14.52% from the three-week low of 14.42% reached on August 4th after the Copom signaled a cautious approach to further interest rate cuts. Although the BCB lowered the Selic rate by a widely expected 25 basis points to 14.0%, its lowest level since March 2025, policymakers stressed that the pace and extent of further easing will depend on incoming economic data and the inflation outlook. The committee also cited heightened uncertainty stemming from conflicts in the Middle East and from the monetary policy outlook in advanced economies. Meanwhile, Brazil created a net 145,161 formal jobs in June, well above expectations of 115,000, reinforcing labor market resilience and supporting expectations that interest rates will remain restrictive. Fiscal concerns also persisted amid signals of higher government spending and pressure on revenues from new US tariffs.