Brazilian Treasury Bonds Outperform Ibovespa Amid Sharp Rate Drop Post-First Round

What happened

In the week of the first round of presidential elections, Brazilian Treasury bonds showed significant appreciation, surpassing the performance of the Ibovespa in some longer-term maturities. This rise was driven by a generalized drop in market interest rates. A survey comparing six fixed-rate and inflation-linked bonds with the Ibovespa, between October 2 and 9, 2026, revealed that the Tesouro IPCA+ 2050 led gains with 13.02%, while the Ibovespa rose 8.82% in the same period. Other long-term papers, such as the Tesouro Prefixado com Juros Semestrais 2037 and the IPCA+ 2040, also outperformed the stock index. The market rate for Tesouro IPCA+ 2050, for example, fell from IPCA + 7.14% to IPCA + 6.60% during the week.

It is important to note that the appreciation of bonds occurs through mark-to-market, where the bond price increases when its yield falls. The longer the maturity, the greater the price sensitivity to rate variations. However, this comparison of gross gains between bonds and the stock market for such a short period, like a week, does not consider the regressive IOF (Tax on Financial Operations) and Income Tax, which would consume a large part of the return in case of early sale, making the stock market outperform in that scenario.

Why it matters

The fall in government bond rates reflects a shift in market expectations regarding the post-election political and fiscal scenario. The appreciation of long-term bonds, in particular, indicates that investors are pricing in a reduction of the risk premium associated with the public debt trajectory, primary deficits, and fiscal risk perception. This suggests a more optimistic view on future economic stability and fiscal management, even if this pricing is based on expectations and not on already defined economic policies. The greater sensitivity of long-term bonds to rate variations makes them an important barometer for the country's long-term risk perception.

Market impact

• Interest rates and bonds: Yields on Brazilian government bonds (Tesouro Direto) fell sharply, especially for longer-term and fixed-rate maturities. This implies an appreciation in the prices of these bonds for those who already held them. The trend is for continued rate declines if positive expectations are consolidated, or a reversal if the scenario deteriorates.
• Dollar and exchange rate: The perception of lower fiscal risk and greater political stability tends to strengthen the real against the dollar, as it attracts foreign capital to local currency-denominated assets. Falling future interest rates can also ease capital outflow pressure.
• Stock market: Although the Ibovespa had a good week, the appreciation of long-term government bonds surpassed that of the stock market in some cases. A scenario of lower fiscal risk and falling future interest rates can be positive for the stock market in the medium and long term, by reducing the cost of capital for companies and increasing risk appetite. However, short-term comparison is complex due to taxes and IOF.
• Brazil: The fall in future interest rates and the appreciation of government bonds are signs of an improved risk perception for the country. This could lead to a more favorable investment environment, potentially stimulating economic growth and attracting investment.

What to watch

Investors should closely monitor the developments of the electoral process, including the final outcome and signals from the new government's economic team. Furthermore, it will be crucial to observe the presentation of concrete economic proposals and policies, especially those related to fiscal management and the public debt trajectory. Macroeconomic data, such as inflation, GDP growth, and fiscal results, will also continue to be important to confirm or invalidate current market expectations.

Scenarios

Base scenario: Fiscal and political improvement expectations are consolidated, leading to continued declines in long-term interest rates and a more favorable environment for risk assets in Brazil, including the stock market and the real. Risk scenario: Current expectations are not met, either due to persistent political uncertainties or economic proposals that increase fiscal risk. This could lead to a reversal of the rate decline, with consequent bond depreciation and pressure on the exchange rate and the stock market.

Original source: InfoMoney. For information only, not investment advice.