Bloomberg Línea — The strategy of betting on the interest rate market to take advantage of the difference between market rates, and the lower projection for Brazil’s Selic rate, may be more risky given the turbulent international scenario and the lack of credibility of President Lula’s economic policy, Evandro Buccini, partner and director of credit and multi-market management at Rio Bravo Investimentos, tells Bloomberg Línea.
In an interview, Buccini said he believes the central bank will end the cycle of Selic cuts at a higher level than expected by the market consensus, which tends to reduce the potential for gains in interest rate bets.
Financial market economists project that the Selic will reach 9.25% annually by the end of 2024, according to the most recent Focus Bulletin (October 30). Meanwhile, the DI futures contracts maturing on January 1, 2025 were trading at 11.03% per year, according to the quote on October 31.
This difference has led some brokers and banks to see potential gains in the interest rate market.
The differential is even greater when looking at the Selic projections for 2025 (8.75% per year) and 2026 (8.5%), while the equivalent DI contracts price rates at 10.9% and 11.15% respectively.
In Buccini’s view, however, the prospect of higher interest rates for longer in the United States tends to limit the space for Brazil’s central bank to cut the Selic rate, reducing the potential for gains in the interest rate market.
“If US interest rates stay where they are, with the 10-year rate close to 5%, Brazil won’t be able to have low single-digit interest rates. I’d say 8% would already be an exaggeration,” he said.
“We’ve been taking more time to understand what the equilibrium level is between the higher US interest rate and Brazil’s, considering a combination of factors. This account is more for the high single digits,” he said.
Rio Bravo, whose founding partners include former central bank president Gustavo Franco, currently has around 13.2 billion reais ($2.69 billion) in assets under management, divided into credit, real estate, multi-market and variable income funds.
Buccini said that he has been looking for references to the years before the 2008 crisis, when the US had higher interest rates, taking into account the changes in Brazil’s economic environment that have occurred since then. Today, the Selic is at a lower level, the public debt has fallen, but the primary result is worse.
“We’re trying to put all this in a ‘blender’ and see what comes of it,” he said.
Given this scenario, Buccini said that Rio Bravo has been less exposed to longer interest rates and has sought a shorter duration (average maturity of pre- and post-fixed securities) that is more protected against inflation.
Buccini also drew attention to the difference between the inflation expectations measured in the Focus Bulletin and the so-called implicit inflation in the interest rate market, which, in his view, is too high.
Today, financial market economists estimate that the consumer price index should reach 3.90% in 2024 - above the 3% target, but within the central bank’s tolerance range of up to 4.5%. Meanwhile, implied inflation suggests a level of 4.26% for November 2024.
The difference indicates a risk premium and suggests that the market sees the possibility of inflation being higher than currently expected due to what it sees as a lack of credibility in economic policy.
Fiscal uncertainty
President Luiz Inácio Lula da Silva’s recent statements indicating the possibility of the government not meeting or even revising the target of zeroing the fiscal deficit by 2024 are one of the examples contributing to the greater uncertainty in the market, Buccini said.
“We don’t know how strong the new fiscal framework is. And the pursuit of the new surplus target, being 100% based on increased revenues, is something that is also not positive considering historical experience. It’s difficult to pass and generates uncertainty, imbalances and inefficiency,” he said.
The fiscal uncertainties, combined with the international scenario of higher interest rates, have weighed on Brazilian assets.
Buccini assessed that Brazilian multi-market funds overreacted in adopting a more optimistic position on Brazil after the approval of the fiscal framework by Congress at the end of first-half, which led to gains in what he defines as a “self-fulfilling prophecy”.
After the change in the international scenario, with the prospect of the Fed keeping interest rates higher for longer, the funds reversed their position, leading to losses.
“We didn’t embark headlong, as perhaps most of the funds here did, on optimism about Brazil in general. We were more optimistic, but not that optimistic,” he said.
Given this scenario, Buccini said that Rio Bravo has adopted a neutral and slightly defensive position, waiting for a clearer definition of the international and domestic environment.
