The approval of the so-called PEC of Auxílios in two rounds in the Federal Senate, last Thursday (30), is another element to add uncertainties to the yield curve, already heavily pressured by a sum of local and global macroeconomic factors. The assessment is made by analysts and managers consulted by the InfoMoney.
The reason is the fiscal impact of the measure, estimated at R$ 41.25 billion. The Proposed Amendment to the Constitution creates social benefits and expands existing programs in response to the crisis caused by rising inflation and worsening social indicators in the country.
Under the PEC, Auxílio Brasil (a social program that replaced Bolsa Família since last December) went from R$400 to R$600 per month. The line of beneficiaries of the program – currently estimated at 1.6 million families – is reduced to zero and a “truck voucher” for autonomous transporters, in the amount of R$ 1,000 per month, as well as an allowance for taxi drivers, is instituted. The proposal still needs to go through the House to take effect.
Economists have pointed to the potentially lasting impact of the measures, even though, according to the PEC definitions, the validity of all of them is until December 2022. For Alberto Ramos, Goldman Sachs research director for Latin America, it is “highly unlikely” that many of the announced measures are reversed in January 2023.
“Short-term transitory tax revenue from high inflation and commodity prices is largely being used to validate extra spending (in an election year) rather than accelerating fiscal adjustments that would likely have generated medium-term economic and social dividends. ,” he wrote in a report.
Renato Lazaro Ramos, managing partner of fixed income at Empírica, reinforces that the positive fiscal data in recent months benefited from effects such as inflation itself, which increased government revenue – which means that, to some extent, they were artificially inflated. . “PEC is one more factor to increase the uncertainty regarding the fiscal situation, which, although it could be worse, is not calm”, he says.
In practice, the bad mood of the markets in the face of the hole – which will be left out of the government spending ceiling – is reflected in the yield curve, which allows observing the expectations for the level of rates in the coming months and years. “We know that this worsens the fiscal scenario even more and raises the risk perception of investors, who end up demanding more premium when evaluating the country”, says Vinicius Romano, fixed income specialist at Suno Research. “In recent weeks, we have seen a sharp rise in interest rates on fixed-rate and inflation-indexed government bonds.”
For now, expectations for the next meeting of the Central Bank’s Monetary Policy Committee (Copom), in August, do not seem to have suffered a setback. “We continue to expect the Central Bank to maintain the pace of tightening at 0.50 percentage point, taking the terminal Selic to 13.75% per year. Afterwards, it will give time to assess the transmission channels of monetary policy”, says a report published on Friday (1) by Mirae Asset. Currently, the Selic is at 13.25%.
Even so, the yield curve rose a few notches. A month ago, it priced interest below 13.50% per annum at its highest point, between April and July 2023. Currently, for the same period, rates are approaching 14% per annum, according to data collected on Friday (1).
“From 2024, the curve predicts rates between 12.50% and 13% for several years”, highlights Camilla Dolle, head of fixed income at XP, noting that the unfolding of the PEC dos Auxílios has mainly affected longer interest rates. – since it is in the next few years that the bill for the expansion of those should arrive and other measures (such as the reduction of ICMS for fuels and electricity) tend to hold inflation in the short term.
Camilla recalls, however, that not only domestic issues are affecting the design of the curve on a daily basis. “We are in a samba between the fiscal issue and the markets abroad, not always with the same weight”, she says.
Inflation is not unique to Brazil. In developed countries, prices have advanced in a worrying way, in the view of some economists. Therefore, monetary policy has been adjusted there as well – which inevitably reverberates in the domestic market.
The hike in US interest rates in June – when the Fed (US central bank) promoted an unexpected 0.75 percentage point hike in rates – sparked new warnings, especially for emerging markets such as Brazil. “With the US economy suffering from high inflation and showing signs of slowing down, there is a feeling in the air that the rest of the world will also succumb,” says Ricardo Peretti, individual strategist at Santander, in a report.
“If, on the one hand, the indication that the trajectory of local inflation is declining could bring some relief, on the other hand, doubts about the pace of interest rate hikes in the US and the consequent risk of recession there should keep assets of countries emerging markets, such as Brazil, are still under pressure”, says the specialist.
Impacts on fixed income investments
The uncertainties about the direction of interest rates echo the recommendations of experts for investments in fixed income.
“Thinking about investors who are willing to stay for a long time, it seems to me that IPCA-linked papers have an interesting condition”, says Ramos, from Empírica. “It is a safe position, protected from inflation, with a real interest level that could even rise, but the level of 6% is already good”.
With the exception of papers of this type, they usually have long maturities and are subject to market fluctuations. Government bonds, for example, are marked-to-market daily, which means that their value is updated depending on current trading conditions.
One of the elements that affect prices are interest rates. When they rise, the prices of these papers tend to depreciate – and if the maturities are distant, the bonds are even more sensitive to variations. In the first half of 2022, for example, the IPCA+ Treasury bond maturing in 2045 lost 9.67% of its value.
Therefore, for investments with a short-term horizon, Ramos continues to suggest floating-rate papers pegged to the CDI rate. “The CDI is at good levels, and everything indicates that it will stay that way for some time.”
Camilla, from XP, says the recommendations haven’t changed despite the newness of the Auxílios PEC. “The more conservative the investor, the more floating-rate securities he should have in his portfolio”, she says. Prefixed bonds are still recommended with great caution, as they tend to have a more volatile behavior. “Rates are high, but we believe that the time is not yet ripe”. For those who insist on this path, his suggestion is to bet on the shortest terms available – maturities of one to two years in the case of private credit and up to three in the case of public bonds.
Romano of Suno has similar recommendations. “Considering the current scenario and our expectations for the coming months, we prefer the allocation in fixed income in public securities with short maturities [até três anos] and intermediaries [entre 3 e 5 anos]”, it says. “Listing in an order of preference, we like floating rates, followed by inflation-linked papers and, finally, fixed rates”.