Cost of servicing Brazil’s ballooning domestic debt falls to record low

The cost to Brazil’s government of servicing its ballooning domestic debt fell to an all-time low in August, official figures showed on Monday, following the drop in official interest rates and a dramatic shortening of the debt profile.

Treasury also said it is monitoring the short-term, floating rate “LFT” market closely, and expects it to stabilize soon as the recent spike in premiums over the central bank’s benchmark Selic rate “at some level” attracts buyers.

“We believe the market is undergoing a repricing shift and that, at some level, it should stabilize,” Luis Felipe Vital, head of debt management, told reporters online after the Treasury released its debt report for August.

As the Treasury chart below shows though, the average rate of interest on the domestic federal debt stock fell to a new low of 7.3% in August, and the average rate of interest on new domestic debt issued in the 12 months to August fell to 4.85%.

Brazil debt interest costs:

Reuters Graphic

The average cost of servicing the wider federal public debt load, meanwhile, slipped to 8.54%, the lowest in a year.

The Brazilian interest rate curve has steepened sharply in recent weeks, with short-term borrowing costs anchored by the central bank lowering its benchmark Selic rate to a record low of 2.00%, and growing angst over Brazil’s fiscal outlook pushing up longer-term rates.

Treasury Secretary Bruno Funchal told Reuters last week that the curve steepening was a “warning” that Brazil has “no room for error” in getting its record debt and deficit back under control.

On Monday the spread between January 2022 and January 2027 interest rate futures widened to 455 basis points, even wider than the market, economic and public health crisis peaks earlier this year.

Brazil rate curve:

Reuters Graphic

As investors cut back on risk and lend to Brazil for shorter time frames, the average maturity of new domestic debt issued in the 12 months to August fell to a new all-time low of 2.36 years from 3.15 years in July, Treasury said.

Brazil’s overall public debt rose 1.56% in August to 4.41 trillion reais ($768 billion), while the total domestic debt stock rose 1.35% to 4.18 trillion reais, Treasury said.

Source: Reuters

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