Long-term real interest rate falls to lowest since November
After rising to 6.5% in March, the long-term real interest rate is beginning to test levels below 6% for the first time since November. The improvement in risk perception since the unveiling of the government’s proposed fiscal framework has helped to support demand for longer-term NTN-Bs (National Treasury notes), especially because rates are at historically high levels. And even with a significant compression of the risk premium in the real interest rate market, market players still see room for a further reduction in rates of inflation-linked securities.In a study by Santander comparing the performance of CDI (interbank benchmark rate) with that of a theoretical NTN-B paying 6% real interest plus inflation over time, NTN-B profitability wins in all the windows studied by the bank - one year, five years, 10 years and 20 years. "We have argued that NTN-Bs with 6% real interest are a good allocation because this high level is not sustainable in the medium term, for good or bad reasons," said Sandro Mazerino Sobral, head of markets and trading at Santander."You can always argue that the 6% real rate is attractive but it can always be ‘more attractive’. This is true, but historically, since 2009, a 10-year NTN-B has been above 6% only 30% of the time, which mainly takes into account a very specific period of stress in 2015 and 2016," Mr. Sobral said.The executive notes that in March, there was upward pressure on long-term real rates, given the uncertainty surrounding the new federal administration and the implementation of fiscal policy. "The pricing that existed on the curve had implicitly added a great risk that a fiscal framework would be worse than the government’s proposal. Even if it wasn’t an extremely restrictive rule, in some way it would limit spending, and therefore the framework would remove the tail risk of having an explosive trajectory for debt. This sentiment has been one of the things responsible for the narrowing of long-term real interest rates."Although NTN-B rates have fallen to around 6% from 6.5%, Santander still likes the security but has a lower appetite at the moment. "There is still a premium, but it has come down a lot. That is why we still have optimistic positions, but we have reduced our exposure a bit," Mr. Sobral said.On the other hand, the executive points out that companies in the benchmark stock index Ibovespa is trading at a discount compared with long-term NTN-Bs. "Even if the real interest rate stays...
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