Investments in Brazilian Government Bonds are rebounding rapidly due to a trifecta of interest income, capital gains, and exchange gains. However, KB Securities noted that the interest rates could be significantly impacted by the fiscal targets set in the annual budget law for 2026, which is scheduled for April.
According to KB Securities on the 20th, the loss rate for Brazilian Government Bonds maturing in about 3 years was 10% last year in terms of won converted basis. However, this year, as of the 18th, it is yielding between 12% and 13%. This marks a recovery from last year's downturn.
Park Jun-woo, a research analyst at KB Securities, said, "More than half of the performance came from exchange gains," adding, "The high real interest rates and immunity to tariff concerns have led to a strengthening of the real against the won."
According to the Korea Securities Depository, domestic investors currently hold $242 million worth of Brazilian bonds (approximately 350 billion won). Brazilian bonds have gained popularity due to their high interest revenue and the tax-exempt benefits under the Korea-Brazil tax treaty.
However, concerns about Brazil's fiscal deficit caused the value of the real to plummet, putting Brazilian Government Bonds investments in a state of emergency. The hike in the base rate due to inflation was also a negative factor, as an increase in interest rates leads to a decrease in bond prices.
On the 19th (local time), the Central Bank of Brazil held a monetary policy meeting and raised the base rate by 1 percentage point to 14.25%. Since September of last year, it has increased the base rate a total of 3.75 percentage points over five occasions, with the most recent three increases being by 1 percentage point each.
The research analyst noted that while interest rate hikes are likely to continue, the sharply rising expected inflation trend appears to have settled down since earlier this month. Additionally, the unemployment rate rose from a low of 6.1% in November last year to 6.5%, and the Organization for Economic Cooperation and Development (OECD) leading economic indicator has fallen from its peak. As tight monetary policy begins to impact the real economy, the possibility of adjusting the intensity has increased.
If the pace of interest rate hikes slows, awareness of changes in monetary policy will grow, and long-term interest rates could decrease ahead of the base rate. The research analyst said, "Expected inflation for 2026 is still on the rise, making additional base rate hikes inevitable," while predicting a 0.5 percentage point increase at the May monetary policy meeting.
The research analyst forecasted that Brazil's budget guideline law will be the final hurdle. The budget guideline law establishes the creation and implementation of the annual budget law for 2026, determining fiscal priorities, expenditure limits, and tax revenue projections. The Brazilian government adjusted its fiscal targets downward through the budget guideline law in 2024, leading to skyrocketing interest rates and a decline in the value of the real.
The research analyst stated, "The deadline for submitting the budget guideline law is April 15," and suggested that if the policy addresses concerns about fiscal soundness, a decline in long-term interest rates can be anticipated. He also remarked, "It wouldn't be too late to pay attention to Brazilian long-term Government Bonds after confirming the final hurdle of fiscal soundness risks."