巴黎银行-新兴市场-宏观策略-巴西：公共债务成本_财政_进一步下降-20190729-10页_2mb

Summary of Document: FOCUS|EM - Brazil: Cost of Public Debt (Fiscal) Declines Further

Core Content

This document provides an analysis of Brazil's public debt situation in June 2019, focusing on the composition, cost, and maturity of public debt, as well as the behavior of investors and the positioning of local funds. It also includes insights on the broader economic and financial implications of these trends.

Main Points

1. Public Debt Composition and Investor Preferences

• The share of non-residents in Brazilian local public debt decreased by 0.8% in June, now standing at BRL472bn (~USD123bn), with BRL3.9bn (~USD1bn) in outflows.
• Non-residents account for 12.3% of total public debt, representing 31.6% of international reserves (currently USD388bn).
• Banks prefer LTN (fixed-rate bullet bonds), while non-resident investors favor NTN-F (fixed-rate coupon bonds) due to their longer duration.
• Pension funds show a clear preference for inflation-linked bonds (NTN-B), holding nearly half of all NTN-B bonds outstanding.

2. Public Debt Exposure to Interest Rates

• Nominal rate exposure is estimated at USD67.3mn DV01, with a monthly decay of USD2.4mn DV01.
• The exposure is concentrated in Jan-23, Jan-25, and Jan-27 bonds.
• Real rate exposure is USD259mn DV01, with a monthly decay of USD1.4mn DV01, mainly concentrated in the Aug-50 bond.

3. Maturity Schedule for the Next 12 Months

• The next major maturity is in October 2019, with BRL105bn (~USD28bn) of fixed-rate bonds.
• The Brazilian National Treasury (BNT) is well positioned to roll over the debt stock in the next 12 months.

4. Annual Borrowing Plan Guidelines

• The BNT aims to replace floating-rate bonds with fixed-rate and inflation-linked instruments in the long term.
• As of June 2019, Brazil's public debt remained in line with the 2018 guidelines but showed a stronger profile than the 2019 targets.
• The share of floating-rate bonds is lower than expected, while the average maturity is higher than expected.
• The lower share of floating-rate bonds is likely due to the small volume of LFTs maturing, not an increase in issuance.

5. Average Cost of Domestic Debt

• The average cost of domestic debt (12-month cumulative) is 8.99% as of June 2019.
• Projections suggest the cost is likely to decline to 8.43% by June 2020, based on BNP Paribas economists' forecasts for IPCA inflation and Selic rate.

6. Portfolio Allocation of Local Private Pension Funds

• In February 2019, local private pension funds (EFPC) had AUM of BRL872bn.
• The share of structured investments has decreased since 2015, while fixed income investments have increased.
• The largest portfolio changes were a BRL37bn increase in FI Funds holdings and a BRL12bn increase in equity fund holdings.

7. Technical Positioning of Local Funds

• Local macro hedge funds are bullish on rates, BRL, and Brazilian equities.
• There has been a rebound in local macro funds' receiver positions, now at 2019 highs.
• The short end of the yield curve has already seen most of the moves, leading to a payer position in April-20.
• Receiver positions in Jan-25 are maintained due to the external environment being favorable for long-term rates in select EM countries.

Key Information

• The cost of domestic debt continues to decline due to low monetary policy rates and converging inflation and credit risk premiums.
• The average maturity of public debt previously peaked in 2015 due to a decline in inflation-linked bonds, but the BNT expects a reversal if fiscal consolidation accelerates.
• The debt structure reflects divergent investor preferences between residents and non-residents.
• Local funds show a reversal in investment trends since June 2019, driven by pension reform, economic indicators, inflation stability, and global yield trends.

Conclusion

The document outlines a decreasing cost of public debt, a decline in non-resident holdings, and divergent bondholder preferences. It also highlights the strategic positioning of local funds and the BNT's ability to manage debt rollover in the coming months. The trend reversal in pension fund allocations and local macro funds is attributed to a mix of domestic and global factors, indicating a shift in market dynamics and investment behavior.