The financial markets of Brazil reacted this Monday to the reelection of Luiz Inácio Lula da Silva as president with a strong punishment to the country's assets: the yield of sovereign bonds in dollars has skyrocketed, the real has depreciated sharply against the greenback, and the São Paulo Stock Exchange has dropped around 17%.
In the long segment of the curve, the yield of 10-year dollar-denominated bonds has risen to 6.478%, which implies an increase of nearly 20 basis points compared to Friday's close. In parallel, the dollar has reached an exchange rate of 5.6056 reais, compared to 4.9777 reais in the last session before the election, representing a loss of value of the Brazilian currency greater than 11%.
Lula, at the head of the Workers' Party (PT), won this Sunday in the second round of the presidential elections with 51.79% of the votes against 48.21% obtained by the ultraconservative Flávio Bolsonaro, son of former president Jair Bolsonaro, thus achieving a non-consecutive fourth term at the helm of the largest country in South America.
The current reaction contrasts with what happened after the first round of the elections, held on October 4. At that time, Bolsonaro was ahead of Lula, although neither reached the sufficient support to avoid a runoff. In the days following, the real appreciated against the dollar and the yields of dollar bonds fell, drawing an opposite scenario to what is recorded now.
"Beyond the chaotic end of the electoral day, Lula's victory is a surprise in itself. The latest polls pointed to a very close result, but prediction platforms gave Senator Bolsonaro a clear win. Brazilian assets had also discounted a favorable result for the markets, based on expectations that a Bolsonaro government would quickly implement a deep fiscal adjustment," explained portfolio manager and analyst at Vontobel, Thierry Larose.
The dollar debt rebounds to 6.5%
The interest on Brazilian sovereign debt denominated in dollars had fallen last Friday to its minimum level of the analyzed period, down to 6.295%, to now rebound to 6.478%, according to figures from "Bloomberg" collected by Europa Press.
Despite this rebound, profitability remains below the 6.78% recorded on October 2, the last session before the first electoral round, standing 30.2 basis points below that record. After that first encounter with the polls, the behavior was initially favorable for bond prices, whose movement is inverse to that of their profitability: the following Monday, the yield fell to 6.595%, 18.5 basis points less.
It is important to differentiate these data from those corresponding to the securities issued in reais. The mentioned figures refer to sovereign debt in dollars, whose yield reflects, among other elements, expectations about the solvency of the Brazilian state and the evolution of international interest rates. In contrast, local currency bonds respond to a different interest rate structure, more conditioned by the monetary policy of the Central Bank of Brazil and internal inflation forecasts.
The dollar exceeds 5.60 reais
In the foreign exchange market, the exchange rate of the dollar reached 5.6056 reais this Monday, compared to 4.9777 reais at the close on Friday, October 23. The increase in the dollar measured in reais is 12.6%, while, seen as a loss of value of the real against the US currency, it implies a depreciation of 11.2%.
With this movement, the exchange rate is at its worst level for the Brazilian currency since July 31, 2025, when it ended the session at 5.6015 reais per dollar. The trajectory after the first round was, however, very different: on October 2, the last day before the first electoral encounter, the dollar was quoted at 5.2133 reais and, the following Monday, fell to 4.9936 reais, a decrease of 4.2% in the price of the dollar expressed in reais.
Strong fluctuations in fixed income and currencies were already on the radar of major asset managers and investment banks. The senior market analyst at Ebury, Diego Barnuevo, recalls that the last five years of Lula's presidency have been characterized by high public spending, a large fiscal deficit, and high interest rates, while the ratio of public debt to GDP has increased by more than ten percentage points.
Despite this, the expert from Vontobel considers that Lula's new Executive "will have no choice but to also undertake measures of fiscal consolidation," although he warns that most investors "doubt that they will be sufficient to get the sustainability of the debt back on track."
The São Paulo Stock Exchange collapses more than 17%
In equities, the São Paulo Stock Exchange has plunged more than 17% this Monday. The Bovespa index (B3) collapsed at the opening to the area of 170,000 points, down from the 205,083 points at which it closed on Friday.
"Lula will not take office until early January, so we are likely facing two months of weakness and volatility, with the possibility of protests and disturbances. Beyond the short-term volatility, the direction of financial markets next year will depend on the correction of Lula's fiscal policy, which must be perceived as lasting and credible," concluded the emerging markets economist at J. Safra Sarasin Sustainable AM, Mali Chivakul.
After the correction this Monday, the Brazilian selective practically erases all the gains accumulated in the year, remaining barely 8% above the closing level of 2025.
Lula thus faces his fourth non-consecutive presidential term, after winning in the elections of 2002, 2006, 2022, and 2026. His first two terms were from 2003 to 2011; he returned to the Presidency in January 2023 and will take office for his new term in January 2027.