Brazil’s 10-Year Yield Edges Higher Ahead of Election Runoff

Brazil’s 10-year government bond yield edged higher, rising above 13% in October amid election uncertainty ahead of the presidential runoff. A Datafolha poll showed Senator Flávio Bolsonaro and President Lula tied at 50% each of valid votes. Earlier polls indicated a statistical tie, with Bolsonaro’s lead narrowing compared with previous surveys. Some market participants believe a Flávio Bolsonaro administration would be more likely to rein in public spending, although neither the candidate nor his economic advisers have outlined concrete fiscal adjustments. Beyond the election, uncertainty surrounding the external environment and rising commodity prices also weighed on the market. Oil prices and US Treasury yields moved higher, adding to upward pressure on Brazilian yields. Meanwhile, Brazil’s mid-month inflation rate reached 4.62% in October, below market expectations of 4.74%.

Brazil’s 10-year government bond yield rose to around 13%, remaining above the two-year low of 12.6% reached on October 5th, as bonds came under pressure amid a narrowing lead for Flávio Bolsonaro over President Lula in runoff polls. Recent surveys reinforced the perception that the incumbent has gained momentum in recent days, prompting investors to reprice risk premiums across the yield curve. Although Flávio Bolsonaro has yet to present detailed policy plans, investors view him as more likely to pursue fiscal reforms, including spending cuts, which are seen as essential to lowering interest rates. Questions also remain about the fiscal discipline of a potential Flávio administration. Political pressure has already prompted the candidate to change his position and support ending the six-days-on, one-day-off work schedule, which the Senate approved yesterday. In addition, the amendment’s approval is also being viewed as a political victory for Lula’s government.

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.