Brazil’s public debt linked to interest rates and FX poised to surpass half of total debt in 2024
By Marcela Ayres
BRASILIA (Reuters) – Brazil’s government expects public debt linked to interest and foreign exchange rates to surpass half of the total debt this year, a level last seen in October 2006, the Treasury indicated in a revision of its annual financing plan on Wednesday.
Known as LFTs, the bonds tied to the country’s benchmark interest rate, Selic, typically reduce predictability in debt management. The government is trying to use fewer LFTs long-term but these bonds are more sought by investors during periods of risk aversion, which occurred this year due to uncertainties surrounding U.S. monetary policy, the Treasury noted.
Brazil’s benchmark interest rate currently stands at 10.5%, and futures indicate a potential hike at the central bank’s next policy meeting on Sept. 17-18.
If confirmed, this would increase the Treasury’s cost of servicing these securities.
Exchange rate-linked bonds are also considered more volatile. The Brazilian real has weakened by about 14% against the U.S. dollar this year, making this portion of the public debt more expensive in local currency.
The currency fell amid monetary uncertainties in the U.S. and fiscal fears in Brazil.
On Wednesday, the Treasury raised the expected share of interest rate-linked bonds to 43%-47% of federal public debt from a previous range of 40%-44%, while maintaining the expected range for exchange rate-linked bonds at 3%-7%.
As of July, these bonds accounted for 44.95% and 4.44% of the total debt, respectively, with the Treasury’s adjustment suggesting they will surpass 50% of total debt by year-end.
The deputy secretary for public debt, Otavio Ladeira, said the anticipated increase in the exchange rate-linked portion of the debt is manageable given Brazil’s robust international reserves and the relatively low share of debt tied to foreign exchange, a stark contrast to the situation seen 18 years ago.
Regarding LFTs, Ladeira noted at a press conference that the expectation of rising interest rates impacts the entire yield curve, including fixed-rate bonds.
“The cost ends up being the same or even higher (for fixed-rate bonds) depending on how much the market is pricing in the interest rate hike relative to what actually happens over time,” he added.
Ladeira said the Treasury was committed to improving the debt composition, aiming to reduce the share of interest rate-linked bonds to 23% by 2035, about half the current level.
In the revision, the Treasury also lowered the expected share of inflation-linked bonds to 25%-29% of total public debt this year from a previous 27%-31%. It also reduced the expected share of fixed-rate bonds to 22%-26%, from 24%-28% previously.
It still expects to end 2024 with public debt between 7 trillion and 7.4 trillion reais ($1.24-1.31 trillion), arguing that the revised debt composition allows for a strategy more in line with market conditions – without adding pressure on the pricing of bonds to be offered for the remainder of the year.
($1 = 5.6326 reais)