Analysis has emerged that Brazil's benchmark interest rate hike phase has entered the final stage. For Brazilian Government Bonds investors, this means they can expect an increase in bond prices (and a decrease in bond yields) due to a shift towards interest rate cuts. However, expectations for foreign exchange profits are likely to diminish due to the strong Korean won against the Brazilian real.
According to the financial investment industry on the 8th, the Central Bank of Brazil (BCB) raised the benchmark interest rate to 14.75% at the May monetary policy meeting. This aligns with market expectations. After raising the benchmark interest rate by 100 basis points (1bp=0.01 percentage points) for three consecutive times, the BCB moderated the pace by raising it by only 50 basis points this time.
Securities firms expect that the BCB will either freeze the benchmark interest rate at the next monetary policy meeting or raise it by only 25 basis points before freezing it again. Evidence for this comes from the BCB's recent statement that removed the phrase about inflation indicators continuing to rise, revised the statement that 'the risks of inflation uncertainty are greater' to 'both upward and downward risks are high,' and softened the language suggesting that a more restrictive currency policy is necessary to express that prolonged tight currency policy is required.
With the BCB raising the benchmark interest rate a total of 425 basis points since last September, evaluations have emerged indicating that Brazil's Government Bonds yields have also reached a peak. Park Jun-woo, a researcher at KB Securities, noted, 'Government Bonds yields tend to reflect the path of the benchmark interest rate in advance,' adding that 'once the hikes end, Government Bonds yields tend to decrease to reflect a freeze or cut afterwards.'
Jeon Byeong-ha, a researcher at NH Investment & Securities, explained that the timing for any interest rate cuts has become significant. He stated, 'From July, liquidity will be provided through precatorios (legal claims the government must pay according to court rulings), and we must consider that momentum in the economy is still alive due to the introduction of salary loans,' predicting, 'A freeze in the benchmark interest rate will continue for the time being with interest rate cuts expected to begin in March 2026.'
If the benchmark interest rate is lowered and the yields on Government Bonds fall, there could be capital gains due to rising Government Bonds prices. According to Korea Securities Depository, domestic investors currently hold $259.63 million (about 360 billion won) in Brazilian bonds. So far this year, they have net purchased $22.61 million (about 30 billion won). Brazilian bonds have gained popularity due to their high interest revenue as well as the tax benefits since interest income is exempted under the Korea-Brazil tax treaty.
However, evaluations indicate that the likelihood of foreign exchange profits decreasing has increased. This is because Asian currencies, including the Korean won, have shown strength recently. Ji Baek-yeon, a researcher at Shinhan Investment Corp, stated, 'The additional stimulus measures by the new Korean government and the alleviation of pressures on stock fund outflows could lead to continued strength in the Korean won,' adding, 'We have no choice but to lower expectations for foreign exchange profits against the won and real until the third quarter (July to September).'