Fed, Jackson Hole, and National Treasury Auctions: What's Driving Interest Now and How Does It Affect Fixed Income?

Fed, Jackson Hole, and National Treasury Auctions: What’s Driving Interest Now and How Does It Affect Fixed Income?

The signal given by the Central Bank at the last meeting of the Monetary Policy Committee (Copom), that the slack rate should remain at 13.75% per annum for a longer period, caused a shift in the interest rate curve and caused prices to fall in the past. Month.

However, recent external moves have worked in the opposite direction in recent days, leading to adjustments in interest rates, which are rising again. Among the factors that have fueled the recent rally is the perception of financial agents that the Federal Reserve (the Federal Reserve, the US central bank) will have to take a tougher stance to contain inflation in the country, raising interest rates by 0.75 percentage points in its monetary system. Policy meeting scheduled for September.

On Thursday (25), for example, the market saw a 62.5% chance that the Fed would make a more aggressive — 0.75 percentage point — increase in US interest rates, versus 37.5% of bets at 0.50 point, according to CME Group. A week ago, the scenario was the opposite: more than half of the analysts saw a likely rise of 0.50 pips.

US monetary policy is interfering with interest rate movements in Brazil. If interest rates rise more than expected in the US, US government bonds come back (Treasury bonds) is also advancing, says Lucas Queiroz, a fixed income strategist for individuals at Itaú BBA.

The trend, says Queiroz, is that this encourages increased investment flows into US public fixed income and hurts flows into Brazilian public bonds, which could lead to higher rates of direct Treasury securities, for example, to attract more investors.

“Increasing interest rates in the United States should provide a boost to the dollar against the real and an increase in interest rates in Brazil,” argues the strategist.

Luiz Eduardo Portella, Partner and Director of Novus Capital, follows the same line and is particularly interested in rising US securities yields (treasury) for ten years, which closed at 3.109% on Wednesday (24). “If the bond starts moving about 3.5% annually, that could pollute the yield curve in Brazil,” he notes.

Jackson Hole Effect

In light of the bets for an even greater increase in US interest rates, the start of the Jackson Hole Symposium – an event that, starting Thursday (25th) – brings together monetary authorities from around the world, was also highlighted on the agenda. The most awaited speech is that of Jerome Powell, Chairman of the Federal Reserve, on Friday (26th), in which he may indicate the next steps in US monetary policy.

Powell’s statement would be particularly important because monetary authority officials’ rhetoric hasn’t been very clear about direction – sometimes referring to tougher tightening, sometimes to less aggressive adjustment, in the opinion of the experts he’s heard Infomoney.

Queiroz, of Itaú BBA, estimates that the Fed has caused volatility in the markets by adopting “erratic communications.” “the speech doves [menos inclinado ao aperto monetário]but the adjustment is approximate, being 75 basis points [0,75 ponto percentual]”The Fed has been a source of instability. It has to continue in its role of guiding the markets. So the rhetoric must be tough now in Jackson Hole, because the inflation target is 2%.”

Read more:
• Jackson Hole: Why the historic central bankers meeting will be closely watched by investors in 2022

On the other hand, Novus’ Portela thinks Powell is likely to adopt a vague rhetoric before seeing the next inflation data. We’ve seen data showing that business expectations are deteriorating, while real activity numbers, such as retail sales, are solid. The Fed should wait for other indicators of inflation,” he says.

What about inflation in Brazil?

Market agents are focusing more on the situation in the United States than on Brazil itself to estimate the direction of domestic interest rates because the country’s short-term inflation indicators are becoming “pro”, according to Queiroz, of the Itaú BBA.

“They lost some relevance from the moment the central bank showed that it is more attentive to the long term, focusing on [das decisões de política monetária] in the first quarter of 2024, compared to the short term,” he notes.

In the minutes of the last meeting of the Central Bank’s Monetary Policy Committee (Copom), when it raised the interest rate to 13.75% per annum, the authority said that it had chosen to “emphasize inflation for a period of 12 months in the first quarter of 2024.” In justification, he said that the adoption of this A related horizon would tend to mitigate the effects of short-term tax changes.

Yesterday’s release of the National Broadcast Consumer Price Index -15 (IPCA-15), with a contraction of 0.73% in August, was above expectations, does not seem to have changed the prevailing view among financial agents, that BC has already finished the cycle. of high interest rates.

Read more:
• IPCA-15 shows that inflation is still entrenched and continues to affect most products and services

Currently, the market estimates there is a 78% chance of Selic holding 13.75% at the September meeting, versus 17% of bets on a 0.25 point increase, according to Copom’s options contracts traded on B3 yesterday.

Although some of the IPCA-15 data came in worse than expected, especially food at home, Itaú analysts defended that some items like milk should register relief at the periphery in the coming months, which will contribute to this group’s downturn going forward. straight ahead.

In addition, industrial goods prices, which surprised upwards this month, are expected to slow significantly in the upcoming measurements, specialists noted.

The data aligns with our reading of gradual inflation over the next few months. Our IPCA forecast remains at 7% for this year,” Itaú specialists confirmed in a report.

Return of foreigners to the national treasury auctions

In addition to external moves, another factor that has helped push the yield curve upward in recent days has been the increased demand for government bonds at national treasury auctions.

The pullback – albeit artificially in inflation – and the indication that the central bank had ended (or about to end) the Selic high cycle, helped change the profile of auction participants slightly, with foreigners returning.

In practice, public bond auctions conducted by the National Treasury are an important source of public debt financing.

Only establishments registered in the Settlement and Custody System (Selic) can participate in it. Whoever obtains IOUs issued by the government lends money to finance the public machine and receives interest as a form of reward on that loan.

Queiroz, from Itau BBA, says Brazil has high interest rates, commodity prices are up a bit, but still much lower than they were at the beginning of the year, and the dollar has been dropping against the real, lowering inflation. short term pressures.

In his view, given this scenario, foreign investors see a window of opportunity to allocate the country’s fixed-rate bonds, as the discussion in Brazil has already begun about when interest rates will begin to fall – unlike other advanced economies, which have begun to tighten monetary policy. Later.

Foreigners come in search of the real price that remains attractive in the country. “For him, the electoral scenario is a bit skewed and the focus is really on rates,” says Jason Vieira, chief economist at Infinity Asset.

Last week, for example, the National Treasury recorded the best auction of the year. The volume of fixed-rate securities traded at R$16.2 billion – an amount that was fully accepted by the market and which highlighted the downward movement in the negotiated interest rates for the fifth consecutive week.

Although demand at auctions remains strong, the national treasury will tend to reduce supply in the coming days, due to higher yields offered by bonds from other countries, such as the United States, ponders Portela, of Novus. “Treasury is taking the opportunity to seize, because the window is good for issuance. He says the country will enter an electoral period soon.

Practically speaking, recent auctions have been replenishment auctions, that is, the goal of the national treasury is to exchange bonds with shorter maturities for longer assets of the same index. This is especially true when there are many short term focused maturities.

The Novus director recalls that at the beginning of last week, the inflation-linked bond in 2022 (NTN-B 2022) expired. In the coming days, Selic-linked floating rate bonds (LFTs) and fixed rate bonds (LTN) will mature in October.

In addition to the greater presence of foreigners at auctions, foreign investors have returned to allocate capital in the Brazilian Stock Exchange. According to B3, the net inflow of foreign investment into the secondary market reached R$17.6 billion in August, as of last Monday (22). In the year, the positive balance was R$71.3 billion.

“Every little care”

Although foreign investors are returning to invest here and bets are focused on the Selic preservation scenario at the September meeting, time is cautious and investors should be given an allotment privilege in floating-rate assets pegged to Selic or a CDI (fixed income reference rate), Queiroz suggests, From Itaú BBA.

“We have a lot of provisions in the post-reform phase. Nobody can beat timing [melhor momento] Everything,” he says. “Election periods tend to be volatile and we need the liquidity to cash in on trades.”

Currently, in the recommended home equity portfolio, 60% of the allocation is in Selic 2025 Treasury, followed by 15% in IPCA + 2026 Treasury, as well as 10% in IPCA + 2035 Treasury and 2025 Prefixed Treasury. The house suggests a 5% exposure to the pre-2029 vault. “We’re still sailing with low visibility, and there’s no need to be careful at this moment,” Queiroz notes.

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