Lula's surprise win hits Korean investors in Brazil bonds
Summary
Korean investors who bought Brazilian government bonds faced losses after Luiz Inacio Lula da Silva’s surprise election victory sent yields higher and the real lower in Brazil on Monday. Investors had been drawn by annual yields of around 10 percent and tax-free interest income under a bilateral treaty. Concerns about government spending and a widening fiscal deficit drove the sell-off, while analysts said the medium- to long-term outlook could offer a buying opportunity if slower growth eases inflation and revives expectations of rate cuts.
Key Facts
- Korean investors bought a net $5.53 million of Brazilian bonds in September, nearly four times the $1.39 million purchased in August, according to SEIBro, operated by the Korea Securities Depository.
- Net purchases of Brazilian bonds by Korean investors totaled $1.78 million through Tuesday this month.
- The yield on Brazil’s 10-year government bond maturing in January 2035 rose to 15.4 percent on Monday from a 52-week low of 12.5 percent earlier in the month.
- The yield increase was estimated to have lowered bond prices by roughly 11 percent, while the real weakened 8.36 percent to 5.406 per U.S. dollar and the Bovespa index fell 17 percent.
- Dean Heo of Hana Securities said 10-year government bond yields had risen by an average of 38 basis points in the month after past left-wing election victories, with increases continuing over the following three months.
A man at a financial company points to a screen displaying market activity in Sao Paulo, Brazil, Monday, following the reelection of President Luiz Inacio Lula da Silva. Reuters-Yonhap
Korean investors who piled into high-yield Brazilian bonds ahead of the country's presidential election are nursing losses after Luiz Inacio Lula da Silva's surprise victory sent bond yields soaring and the currency tumbling, analysts said Wednesday.
Brazilian government bonds have been popular among wealthy Korean investors, offering annual yields of around 10 percent and tax-free interest income under a bilateral tax treaty between Korea and Brazil.
Korean investors purchased a net $5.53 million worth of Brazilian bonds in September, nearly four times the $1.39 million recorded the previous month, according to SEIBro, a data portal operated by the Korea Securities Depository.
They continued to buy Brazilian bonds this month, with net purchases totaling $1.78 million through Tuesday.
Investor sentiment was buoyed by improving market conditions ahead of the presidential election amid growing expectations of a right-wing victory.
However, market sentiment shifted sharply after the election outcome. Growing concerns over increased government spending and a widening fiscal deficit sent government bond yields soaring, driving bond prices lower while the real weakened.
The yield on Brazil's 10-year government bond maturing in January 2035 fell to a 52-week low of 12.5 percent earlier this month before surging to 15.4 percent on Monday (local time). The jump represented an increase of about 2.4 percentage points from the previous trading session, a move estimated to have driven bond prices down by roughly 11 percent.
The real also tumbled, weakening 8.36 percent to 5.406 per U.S. dollar on Monday. Brazil's benchmark Bovespa index plunged 17 percent, posting its biggest decline since the COVID-19 pandemic rattled markets in March 2020.
Korean bond investors now face the risk of suffering losses from both falling bond prices and unfavorable currency movements. Investors who bought Brazilian bonds in October, when the real had strengthened to 4.98 per U.S. dollar, are expected to suffer even steeper losses.
Analysts say further weakness in the Brazilian real and declines in government bond prices are likely in the short term.
"During past left-wing election victories in Brazil, 10-year government bond yields rose by an average of 38 basis points in the month after the runoff, with gains extending over the following three months," said Dean Heo, a fixed-income analyst at Hana Securities.
"Unlike previous elections, when bond prices showed little movement ahead of the runoff, a strong pre-election rally this time could amplify the market fallout."
Still, the sell-off could present a buying opportunity over the medium to long term, analysts said, as a prolonged economic slowdown caused by high interest rates could ease inflationary pressures and revive expectations of interest rate cuts by Brazil's central bank.
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