The Brazilian Treasury has canceled the inflation-linked and fixed-rate debt auctions scheduled for October 27 and 29, respectively, amid the financial turmoil unleashed after the electoral victory of Luiz Inácio Lula da Silva. The decision coincides with a day of heavy selling in Brazilian assets, which has forced a temporary halt to stock trading.
The withdrawal affects part of the state's financing calendar, as the auction of Letras Financeiras do Tesouro —LFT— on Tuesday the 27 continues as planned. These securities offer a return linked to the Selic, the benchmark interest rate of the Brazilian central bank.
The available information does not specify how much the Treasury intended to raise with the canceled operations nor announces new dates to hold them. The agency has communicated that it will continue to monitor conditions to ensure the functioning of the public debt market.
Withdrawal under pressure on interest rates
The cancellation occurs as investors reassess their expectations regarding Brazilian fiscal policy, after betting on a victory for Flávio Bolsonaro and a more intense adjustment of public accounts. Sales have affected both debt and the stock market and the real, while interest rates on futures contracts have increased.
From a financial perspective, withdrawing the issuances allows to avoid a placement under exceptionally adverse conditions. When the perception of risk increases, buyers demand a higher yield to lend to the state, which can make financing obtained in a fixed-rate auction more expensive for years.
In inflation-linked bonds, the cost also depends on the real yield offered to the investor, in addition to the adjustment associated with prices. Therefore, the protection against inflation that buyers receive does not eliminate the risk of an issuance being more expensive for the Treasury.
Financing linked to the Selic continues
The decision to maintain the LFT auction allows the Treasury to continue raising resources through securities whose remuneration adjusts to the evolution of the Selic. This route remains attractive to investors when there is uncertainty about rates, although it leaves the issuer more exposed to them remaining high.
The dependence on this instrument had already increased before the elections. In August, the Treasury raised its forecast for the weight of federal debt linked to interest rates, to a range of 49%-53%, compared to the previous 46%-50%, according to Reuters. The agency related that change to the preference of investors for shorter-term securities during episodes of volatility.
If the Selic remains high for a longer time, the remuneration of these securities will also continue to be high. The composition of the issuances is thus relevant for public accounts, in addition to the total volume of debt that Brazil needs to finance.
The cancellation does not imply a suspension of payments
The withdrawal of the two auctions affects planned operations to obtain new financing and does not modify the payment obligations of the securities that are already in circulation. It also does not mean that the issuances have gone deserted, since they were canceled before being held.
Its impact will depend on when the placements are recovered, the conditions required by investors, and the alternatives that the Treasury uses. For now, the published information does not allow calculating how much money will stop being raised this week nor what savings or extra costs may arise from the decision.