Brazil Stocks Sink 13.9%, Bond Yields Climb Above 15% After Lula Secures Fourth Term

Brazil’s financial markets were jolted after President Luiz Inacio Lula da Silva secured a fourth term. Stocks and the real tumbled, while government bond yields surged, stoking concern over fiscal deterioration and a prolonged period of high interest rates.

On October 27, the Bovespa index fell more than 17% intraday before closing down 13.9% from the previous session. It was the steepest drop since March 2020, when markets were hit by the Covid-19 shock. The real also slid more than 10% against the dollar during the session before ending the day down about 8%.

Selling centered on heavily indebted companies. Retailers Lojas Quero-Quero and Magazine Luiza plunged as much as 66% and 60%, respectively, during the session. Car-rental company Movida dropped 60%, while homebuilder MRV fell as much as 45%.

Investors appeared worried that the Lula administration’s expansionary fiscal stance could prolong inflation and keep interest rates higher for longer. Continued price pressures would raise companies’ debt-servicing costs while eroding consumers’ purchasing power.

The bond market also swung sharply. Brazil’s 10-year government bond yield rose 2.46 percentage points in a single day to 15.450%. At one point, the increase reached 3.398 percentage points.

Brazil’s government moved to calm markets. It canceled inflation-linked and fixed-rate government bond auctions scheduled for October 27 and October 29, and repurchased about 14.8 billion reais of sovereign debt.

Private-sector debt burdens are already high. According to credit bureau Serasa, about 84 million Brazilians and 9.3 million companies were behind on debt payments as of August, both record highs.

Concerns are also mounting over fiscal capacity. Brazil’s national debt stands at about 83% of gross domestic product, up more than 10 percentage points in the more than three years since Lula’s third administration began. The International Monetary Fund projects Brazil’s fiscal deficit will reach 8% of GDP this year.

Matthew Culley, a portfolio manager at Janus Henderson, said Brazil’s economy would take a substantial hit if government bond yields around 15% persist for another four years. A weaker real could lift inflation expectations and market interest rates, creating a vicious cycle that further expands the government’s interest burden.

Finance Minister Dario Durigan said Brazil would achieve a primary budget surplus next year, but he did not present specific measures to improve the fiscal outlook.

William Foster, Moody’s senior vice president for sovereign ratings, said pressure could build to revise Brazil’s credit outlook to negative if debt keeps rising without a credible long-term deficit-reduction plan. Moody’s currently rates Brazil at Ba1, one notch below investment grade, with a stable outlook.