Brazil’s public debt, linked to interest rates and FX, poised to exceed half of total debt in 2024 By Reuters

By Marcela Ayres

BRASILIA (Reuters) – Brazil’s government expects public debt linked to interest and exchange rates to exceed half of total debt this year, a level last seen in October 2006, the Treasury said in a review of its annual plan of funding on Wednesday.

Known as LFTs, bonds linked to the country’s benchmark interest rate, Selic, typically reduce predictability in debt management. The government is trying to use less long-term LFTs, but these bonds are more sought after by investors during periods of risk aversion, which have arisen this year due to uncertainties over US monetary policy, the Treasury noted.

Brazil’s benchmark interest rate is currently 10.5% and futures point to a potential hike at the central bank’s next policy meeting on September 17-18.

If confirmed, this would increase the cost to the Treasury of servicing these securities.

Bonds linked to the exchange rate are also considered more volatile. The Brazilian real has weakened about 14% against the US dollar this year, making this part of the public debt more expensive in local currency.

The currency fell amid monetary uncertainties in the US 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 keeping the expected range for exchange-rate-linked bonds at 3 % -7%.

As of July, these bonds represented 44.95% and 4.44% of total debt, respectively, with the Treasury’s adjustment suggesting they will exceed 50% of total debt by the end of the year.

Public Debt Undersecretary Otavio Ladeira said the anticipated increase in the exchange-rate portion of the debt was manageable given Brazil’s solid international reserves and the relatively low share of currency-linked debt, a stark contrast to the situation . 18 years ago.

Regarding LFTs, Ladeira noted in a press conference that the expectation of rising interest rates has an impact on 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 values ​​the rate hike relative to what actually happens over time,” he added.

Ladeira said the Treasury was committed to improving the composition of debt, aiming to reduce the share of interest-rate-linked bonds to 23 percent by 2035, about half of the current level.

As part of the review, the Treasury also cut the expected share of inflation-linked bonds to 25%-29% of total public debt this year, from 27%-31% previously. It also cut its expected share of fixed-rate bonds to 22%-26%, from 24%-28% previously.

It is still expected to end 2024 with public debt between 7 trillion and 7.4 trillion reais ($1.24-1.31 trillion), arguing that the revised debt structure allows for a more market-aligned strategy – without adding pressure on bond prices. offered for the rest of the year.

($1 = 5.6326 reais)