Treasury sees rise of long-term interest rates as fiscal risk warning
The booming public debt, side effect of the policy to fight the pandemic's effects, has put the National Treasury in a trial by fire: financing about R$800 billion on the market when there are many doubts about the future of Brazil's public accounts and when the interest rate has never been so low.This situation has been causing a sharp rise of long-term interest rates and also an increase in the risk premium demanded by investors who buy the debt securities issued by the Treasury, both the prefixed ones (LTN and NTN-F) and the LFTs, securities indexed to the Selic base interest rate. For the National Treasury secretary, Bruno Funchal, and for the undersecretary of debt, José Franco de Moraes, who spoke with Valor on Wednesday, the rise in debt premium must be seen as "an adjustment in relative prices," something "transitory." They said there was no sign whatsoever of dysfunction that justifies a market intervention. But both acknowledged that, when looking at interest futures traded on exchange B3, what one sees is a clear sign of concern with the future that must be alleviated. "This spread and this yield curve is the warning that we must address the issue of return to the process of account adjustment," Mr. Funchal said.
"When we see the debt increase and we are in the middle of this debate, we need to take a step ahead in the fiscal consolidation, get out of the pandemic and resume the agenda of fiscal consolidation, in this transition you have these movements that put pressure."
Mr. Funchal was quite emphatic in the defense of the spending cap and against relaxation of this instrument. "I have a binary view regarding the cap, because it is based much on credibility. One relaxation leads to another relaxation. We work without relaxation, you have to follow strictly the text," he said, stressing that another path probably would push rates further up and put brakes on the economic growth, which he sees optimistically. Mr. Franco pointed out that long-term rates rose about 100 basis points in only two weeks because of the growth of doubts about how the fiscal issues will be addressed. But it is not possible, he said, to give the same explanation for the fact that LFTs are trading with discount on the secondary market - event that has direct impact on the returns of money-market funds. "The widening of the LFT rates is something natural, since the return of LFTs tends to be very similar to that of LTNs. Since the spread of LTNs widened, this also should happen with that of LFTs. Given the balance of risks, the market is not satisfied in receiving only the Selic ? With the LFT spread increasing, the holder of the security suffers, but the security becomes more attractive for those who are with repos or in LTNs," he said, adding that it even took long for this movement to happen.
Below, excerpts from the interview with Valor:
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