Real rates fall to lowest since 2021
Although the market has already priced in a relevant number of cuts in Brazil’s key interest rate Selic, the beginning of the monetary easing cycle was seen by financial agents as an opportunity to bet that medium-term real interest rates will drop. With a more aggressive cut in the policy rate than expected by much of the market and the expectation of a more "dovish" (inclined to lower rates) composition of the Central Bank’s Monetary Policy Committee (Copom), medium-term real interest rates fell to their lowest level since December 2021, below the 5% level adjusted by inflation.The demand for NTN-Bs - government bonds indexed to inflation - was significant, which caused rates to fall, especially for medium-term maturities. The real interest rate measured by NTN-B notes for August 2030 fell to 4.966% this week. And even in even longer maturities, rates have been falling steadily in recent days. The real interest rate as measured by the NTN-B for May 2055 reached 5.341%, also the lowest level since December 2021.The demand for these securities comes at a time when agents expect a fall in real interest rates in the face of the beginning of monetary easing, and also adopt the perception that the future composition of the Copom may seek lower real interest rates by being able to allow inflation above the center of the 3% target."If history is any guide, 10-year real interest rates will continue to fall in Brazil," said David Beker, head of Brazil economics and Latin America equity strategy at Bank of America. "We expect long-term market interest rates to continue to fall as we move through the easing cycle. In the last three easing cycles, for every 100-basis-point cut in the Selic, we have seen a 0.4 percentage point decline in real 10-year market rates," Mr. Beker wrote in a note to clients.The prospect of falling real rates is echoed by Gustavo Pessoa, partner and fixed income manager at Legacy Capital, who points out that the firm has increased its long positions in intermediate-term NTN-Bs. "It is difficult to know how the cycle of rate cuts will unfold and end. In general, the market thinks that monetary policy will be less restrictive, then it will go to the neutral level, and then it begins to consider the possibility of going to the stimulative territory. For now, we are still in the first phase, which will take the real interest rate to a lower level," he said.In this sense, Mr. Pessoa said that Legacy still sees inflation as well...
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