U.S. Treasuries increasingly a drag on Brazilian equities
The dynamics of the U.S. Treasury bond market began to play a significant role in the Ibovespa’s fluctuations in the second half of this year, reversing the trend of the recent past, when the impact of U.S. government bonds was relatively limited.The correlation between the behavior of long-term Treasuries and the main index of the Brazilian stock market reached 78.74% in the last four months, in a sign that the jump in U.S. interest rates weighed on stocks in Brazil in September and October, while the relevant relief seen this month boosted the Ibovespa to its highest levels since 2021.Considered the safest investment in the world, U.S. government bonds are used as a benchmark for pricing other assets. So when long-term Treasuries start to trade at higher rates, U.S. equity markets tend to underperform.In 2022, the correlation between long-term Treasuries and the Ibovespa was in the negative—indicating that the influence of U.S. interest rates was not directly reflected in the behavior of the main Brazilian stock market index. In the second half of this year, the situation has changed. The Treasuries have particularly influenced the behavior of foreign investors and, consequently, the flows from the category to local shares."The Treasuries are the world’s risk-free asset, so it’s a central variable in determining the value of any asset. When you say that Brazil is doing well or badly, you’re talking about the spread in relation to the Treasury," said Andrew Reider, WHG’s chief investment officer. "We’ve never had such a quick movement in Treasuries. At the beginning of 2022, the U.S. real interest rate [discounting inflation] was negative; in 18 months, there has been a radical change, and that has an impact on any security. If a large allocator can get 2.5% real interest ‘forever’, that can address their liabilities and take liquidity out of the system."This movement was seen in the behavior of foreign investors, who made intense withdrawals from B3 between July and October, during the rise in U.S. rates. On the other hand, foreign contributions to the domestic stock market have come back strongly since the American yield curve eased somewhat, in a period that also coincided with good news on Brazil’s fiscal policy, such as the maintenance of the federal government’s zero-deficit target for 2024.According to the most recent data released by B3, in November, up to the 27th, non-resident investors invested R$17.41 billion in the local stock...
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