Foreigners will continue to buy Brazil, XP says
The external scenario of high interest rates and a strong dollar should not be a concern for Brazil to attract investors, according to Fernando Ferreira, chief strategist at XP. In an interview with Valor, he said that foreigners are more concerned with the global scenario —of resilient inflation, potential recession and geopolitical conflicts— than with local issues such as Brazil’s fiscal situation or how far the Central Bank will cut interest rates."The correlation between the Brazilian stock market and the Treasury yield is very low, unlike the S&P. Foreigners will continue to buy Brazil even if interest rates abroad stay higher for longer," he said. Read below the main excerpts from the interview:Valor: Should this high volatility in U.S. Treasury bonds yields continue?Fernando Ferreira: The scenario is very challenging. U.S. Treasury bonds yields eased at the beginning of the week, but the medium and long-term fundamentals of high interest rates in the U.S. and the fiscal imbalance between supply and demand for bonds should keep long-term yields high. This drop in yields was not caused by a drop in inflation or an improvement in the economy. I see three main reasons. First, risk aversion due to the conflict in Israel. Second, several members of the Federal Reserve [Fed] have said that the rise in yields has taken the pressure off the Central Bank to raise interest rates, and the market has responded to that. Even when the Fed said it’s not going to cut rates, the market is starting to price in a cut, as happened during the Silicon Valley Bank crisis. The market priced in a 150-basis point cut for this year, which didn’t happen. The third reason is that the market was very oversold and rose very quickly, driven by the higher premium that investors demand in long-term interest rates for taking on volatility risks for longer, the "term premium." And then there’s the issue of new issuance.Valor: U.S. Treasury bonds issuance?Mr. Ferreira: Exactly. The large volume of U.S. Treasury bonds issuance creates a mismatch between supply and demand. Since the debt ceiling crisis at the end of June, U.S. debt has increased by $3.3 billion. As a result, bond yields have risen rapidly. And in addition to the U.S. Treasury, China is selling Treasuries, the Fed itself is reducing its balance sheet of assets, and other central banks around the world are diversifying their forex reserves. And the demand for Treasuries is really...
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