Monday, May 18, 2009

New Brazilian Bonds in International Markets

Brazil will offer more 10- and 30-year bonds in international markets this year, tapping into demand for the country’s most-traded securities. As we mentioned in a previous blog, Brazil also sold almost $2 bn of 10 year note in January and in May. Both issuances were extremely successful especially considering that the financial crisis has eased.

Brazilian bonds have outperformed other emerging-market debt in the past year and the country has accumulated more than $200 billion in international reserves. Brazil’s foreign bonds returned 3.1 percent in the past 12 months while emerging-market bonds on average declined 2.2 percent.

The idea of the National Treasury of Brazil is to change the external debt profile by buying back less-traded bonds with high interest rates such as the securities due in 2020 and 2030 to focus trading in the newly created benchmarks. Indeed, the debt buyback that started in 2006 is already repurchasing an average of about $100 million of bonds each month.

The point is that securities that were issued a while ago have greater yield than others that were issued lately. This brings a distortion in the yield curve and makes it harder for the Treasury to place new offers. For example, the 2020 bonds, for example, yield 3.11 percentage points above Treasuries but the 2019 bonds yield 2.67 percentage points more than Treasuries -- or 0.44 percentage point less than the 2020 securities.

In comparison to the securities that were recently issued by Colombia, Brazilian bonds issued in January underperformed. Still, we should consider that the market volatility is still high and hence Brazil didn´t have an easy time to place the new notes. The whole point is that the Treasury is not only trying to buy back the most expensive part of the debt but also it is trying to reduce the yields of the whole curve. This is so because Brazil is no longer seen as a risky and insolvent country as it was in the past. The premium (over Treasury) to hold Brazilian bonds, in turn, should be decreased. This is what the Treasury is currently trying to accomplish with the debt buyback and the issuance of new and low yield securities.

1 comment:

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