Brazil 10-Year Yield Falls to Two-Year Low

Brazil’s 10-year government bond yield fell to around 12.68% in October, reaching a two-year low amid a rally in domestic assets driven by the election outlook. The first voting-intention polls released after the first round confirmed Senator Flávio Bolsonaro’s lead over President Lula in the runoff scheduled for October 25th, although some results remained within a statistical tie. Markets view Bolsonaro as more fiscally restrictive, and his lead strengthened expectations that a potential administration could tighten control over public spending and take steps to improve Brazil’s fiscal position. Lower pressure on public finances could reduce the risk premium demanded by investors, while tighter fiscal policy could ease inflationary pressures, potentially allowing the Central Bank of Brazil to cut interest rates more quickly.

Brazil’s 10-year government bond yield fell to 13%, reaching a near one year low after Flávio Bolsonaro finished ahead of President Lula in the first round of the presidential election, defying most polls. The result triggered a sharp repricing of Brazilian assets. Senator Bolsonaro received 47.03% of valid votes, compared with 45.16% for President Lula. Bolsonaro outperformed the average of polls tracked by Goldman Sachs by more than four percentage points. The senator is viewed by markets as more fiscally restrictive, amid elevated domestic yields and weak business activity. The result strengthened expectations that a Bolsonaro administration could pursue tighter control of public spending and measures to improve Brazil’s deteriorating fiscal position. Lower pressure on public finances could reduce the risk premium demanded by investors, while contractionary fiscal policy could ease inflationary pressures. These factors could allow the BCB to cut interest rates more quickly.

Brazilian government bonds are expected to open stronger on Monday as investors reassess the country’s fiscal outlook following Flávio Bolsonaro’s first-round lead over President Luiz Inácio Lula da Silva. Bolsonaro received 47.03% of valid votes, compared with Lula’s 45.16%, sending the election to a runoff on October 25. The result has strengthened expectations that a Bolsonaro administration could pursue tighter control of public spending and measures aimed at improving Brazil’s deteriorating fiscal position. Those expectations may support government debt and put downward pressure on yields, although investors are likely to remain cautious given the closely contested race. The 10-year government bond yield rose for a second consecutive session on Friday to 14.3%, moving further from its three-and-a-half-month low of 14.045% recorded on Wednesday.