What do falling yields mean for Brazil?
Brazil’s 10-year sovereign debt is currently trading at yields below 11%. The last time the markets saw yields in this Latin American (ILF) country drop below the 11% mark was in mid-2013. Since then, benchmark bond yields in Brazil have been rising amid deteriorating economic conditions, thereby increasing riskiness in this emerging market (EEM) (VWO) economy. A higher yield often entails a higher risk profile and vice versa.
Over the last 3 years, Brazil (EWZ) (BRZU) (BZQ) has witnessed economic recession, rising unemployment, and rampant inflation. On top of all that, its also suffered from a heightened corruption involving state-owned oil company, Petrobras (PBR) (PZE). For an economy where commodity exports account for a major portion of its export revenues, the decline in commodity prices since mid-2014 only added fuel to the countries economies woes. Iron ore, oil, and sugar comprise the top 3 exports of Brazil accounting for about 12%, 9% and 4.3% of its export revenue, respectively.
August 2016 saw the impeachment of Dilma Rousseff from her post as President, being found guilty of fiscal pedaling. Since then, Brazil is being run under the leadership of its new President Michel Temer, who took office August 31, 2016.
But the storm seems to have turned from Brazil now. Inflation has slid from 10.71% recorded in January this year to 6.29% currently. The Brazilian real, which had largely been depreciating since 2013, finally turned course. Since January 2016 the currency has already appreciated by about 22.7% (from BRL 4.1 per US dollar in January 2016 to BRL 3.17/USD currently). However, unemployment continues to rein in the double-digits at 11.9%.
Nonetheless, the Brazilian stocks= markets; a leading indicator of economic expectations; are up by almost 40% over the last 2 years.
The yield on the government’s 10-year bond has also been sliding over the period; from 16.76% in January 2016, it recently dipped below 11% in January 2017. This is the first time since mid-2013 that we’re seeing yields on Brazil’s 10-year sovereign debt dip below the 11% mark.
Is the worst over for Brazil?
According to an OECD (Organization for Economic Co-operation and Development) forecast, “The economy is emerging from a severe and protracted recession. Political uncertainty has diminished, consumer and business confidence are rising and investment has strengthened. However, unemployment is projected to continue rising until 2017 and decline only gradually thereafter. Inflation will gradually return into the target range.”
According to the IMF, Brazil’s economic prospects hinge on the new government’s ability to implement ambitious structural reforms to restore fiscal sustainability. Risks continue to dominate the outlook, but positive signs are emerging.