As Brazil reopens gates to capital inflows, foreign bond purchases jump
Despite all the market talk about Brazil’s frustrating performance over the past few years, Latin America’s largest economy remains a top destination for global funds in at least one area: fixed income markets.
Foreign purchases of local debt have jumped since June, when Brazil, shaken by prospects of higher market interest rates in the United States, scrapped a key tax on foreign investments in local bonds.
Monthly inflows to local bonds and other fixed-income instruments traded onshore soared to an average of $6 billion between June and September, from just $0.8 billion in the first five months of the year, according to the chart below based on central bank data released on Friday:
Another chart put together by BNP Paribas shows how foreign ownership of Brazilian local debt rose a full percentage point in September to 17.2 percent:
Opening the gates to foreign inflows was probably not the only reason behind the change. With interest rates rising steadily since April towards 10 percent, nearly three times as higher as in Mexico, Brazilian debt offers one of the highest returns among the world’s biggest emerging economies.
Combined with an aggressive program of daily central bank interventions in currency markets, the inflows have probably helped stabilize Brazil’s real, seen until just two months ago as one of the world’s most vulnerable to the expected tapering in Federal Reserve’s monthly asset purchases.
When it comes to fixed income, investors showed no hard feelings about the capital controls; as soon as they were removed, Brazil’s debt markets have gradually return to business as usual.