Brazil 10-Year Yield Rises as Fiscal Adjustment Bill Disappoints

The yield on the 10-year Brazilian government bond rose to around 15.37%, remaining near the ten-year high of 15.75% reached on November 3, as the government’s fiscal adjustment proposal disappointed markets. Markets had previously welcomed the news as an initial step toward a more robust fiscal agenda, but now view the bill as a timid adjustment. The measures are understood not to focus on structural adjustments to reverse the growing public debt trajectory, but rather on opening more room for spending freezes to reach the 0.5% of GDP surplus target for 2027. Meanwhile, annual inflation rose to 4.63% in October from 4.58% in September, below market expectations of 4.74% but marking a four-month high and remaining above the BCB’s 4.5% target ceiling. With inflation still above target, the BCB is expected to remain cautious about resuming its Selic easing cycle.

The yield on the 10-year Brazilian government bond fell to the 15.2% level from the ten-year high of 15.75% reached on November 3rd after the government’s economic team presented a preliminary fiscal adjustment proposal to Congress. Although details remain scarce, it is the first concrete sign of public-account adjustment since President Lula’s reelection. Earlier this month, Lula reiterated that his government is committed to fiscal responsibility while also considering social responsibility, amid pressure to announce adjustment measures after Brazilian assets plunged following his late-October reelection. Meanwhile, BCB policymakers suggested in the latest meeting minutes that elevated interest rates have already dampened economic activity, hinting that rate cuts may be needed to address slower growth and risks to unemployment.

Brazil’s 10-year government bond yield pared gains to hover around 15.18% in November after President Lula reassured markets on fiscal adjustment. Lula reiterated that his government is committed to fiscal responsibility while also considering social responsibility, amid pressure to announce adjustment measures and a drop in Brazilian assets after his late-October reelection. Investors remain focused on fiscal policy, especially the government’s commitment to controlling spending and public debt, which has risen significantly in recent years. Meanwhile, US nonfarm payrolls increased by 165,000 last month, topping all forecasts, and the unemployment rate edged lower. The stronger figures reinforced expectations that the Fed will maintain a restrictive stance. Higher-for-longer rates in advanced economies could also pressure the BCB to keep policy restrictive. The BCB held the Selic rate at 13.75% at its latest meeting, pausing its easing cycle.