Brazil’s 10-Year Yield Set to Rise After Lula Wins

Brazil’s 10-year government bond yield is expected to rise on Monday after President Luiz Inácio Lula da Silva won re-election with 51.78% of valid votes, defeating Flávio Bolsonaro, who received 48.22%. The result is expected to reverse gains in Brazilian assets accumulated after the first round, when Bolsonaro’s lead fueled expectations of tighter fiscal policy and spending restraint. Investors had viewed a potential Bolsonaro administration as more likely to pursue measures to improve public finances, potentially lowering the risk premium on government debt. Lula’s victory has renewed concerns over fiscal discipline, elevated public debt and the sustainability of government spending, prompting analysts to anticipate higher borrowing costs, particularly at the longer end of the yield curve.

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.