Introduction: Following recent fiscal turbulence in Brazil, foreign investors are cautiously re-entering the market. The country’s dollar-denominated corporate bonds, particularly those from companies like Raízen (RAIZ4) and Usiminas (USIM5), are gaining attention.
Current Market Scenario: Fund managers are now investing in Brazilian assets again, driven by the attractive premiums on corporate bonds. Brazilian dollar corporate bonds have offered a return of 2.2% since the beginning of the year, nearly double the average of emerging market corporate bonds.
Local Asset Performance: Local assets have also benefited from a recent reprieve, as U.S. President Donald Trump has shifted his focus to other emerging economies. The Brazilian real has appreciated nearly 8% this year, making it the best-performing currency among major global currencies, according to Bloomberg data. This has helped spur a 13% rally in local stocks in dollar terms. Additionally, several Brazilian companies have returned to the debt market, including Embraer (EMBR3), Ambipar (AMBP3), and JBS (JBSS3).
Relief After Turbulence: This movement marks a stark contrast to the end of 2024, when Brazilian financial markets plummeted amid doubts about President Luiz Inácio Lula da Silva’s commitment to fiscal austerity. The widespread sell-off led the real to a record low and impacted local stocks, bonds, and dollar corporate bonds.
Impact of High Interest Rates: Brazil’s interest rate is expected to reach 15%, the highest level in nearly two decades. The Central Bank predicts that inflation will remain above the 3% target in the coming months, driven by rising food and service prices, necessitating tighter monetary policy.
Opportunities and Risks: “There are opportunities in Brazilian corporate bonds, but one must be comfortable with exposure to high-interest rates and a likely economic slowdown,” said Mauro Favini, senior portfolio manager at Vanguard. Foreign investors still prefer dollar corporate bonds, as the local debt market remains dominated by domestic investors. Differences in bankruptcy laws, tax regulations, and currency risks deter international investors from the domestic market.
Improved Risk-Return Ratio: Since December, the risk-return ratio for investments in Brazil has improved, according to Dimitry Griko, chief investment officer at Arkaim Advisors. His firm has focused on companies less exposed to currency depreciation or domestic demand risks, preferring exporters or companies with dollar-denominated revenues.
Commercial Policies and Global Impact: Trump’s trade policies are creating new divisions among emerging economies, with export-dependent countries seen as more vulnerable to tariffs. Brazil’s exports to the U.S. accounted for 12.8% of the country’s total sales in January 2025, while sales to China were 21.7%, according to the Ministry of Foreign Trade.
Ongoing Fiscal Concerns: Despite the recent recovery, investors remain skeptical about Lula’s commitment to controlling public spending. Brazil ended 2024 with a nominal deficit of R$ 998 billion, equivalent to 8.45% of GDP, a slight improvement from the 8.84% of GDP recorded in 2023.
Conclusion: Brazilian bonds may offer value compared to other emerging markets if investors become more comfortable with the fiscal situation. “The market started pricing in fiscal relief in January, and Brazilian assets reacted positively, but fiscal issues remain a central concern,” said Guido Chamorro, co-head of emerging market debt at Pictet Asset Management Ltd.
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