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Market Overview

Brazil's Country-Specific Risk Surges To 8-Year High, Closing Gap With Argentina

  • Year-to-date, Brazil’s country-specific risk rose by 50 percent.
  • The figure now stands at its highest level since 2007.
  • The deterioration limits the country’s bonds’ growth potential.

In an article published on, Pablo Wende looked into the rise of Brazil’s country-specific risk over 2015, which surged by 50 percent to 390 basis points, since the beginning of the year.

The writer noted that Brazilian bonds, which were already affected negatively by the sluggishness in the country’s economy, the fiscal deficit and by the corruption scandal involving government officials and Petroleo Brasileiro Petrobras SA (ADR) (NYSE: PBR), have tended downwards quickly over the past few days, following S&P’s downgrade of Brazil’s sovereign credit rating to BB+ - or “junk.”

Related Link: S&P Cuts Brazil To Junk: What It Means

The risk in Brazil, understood as the distance between the country’s bonds and U.S. Treasuries, had reached 260 basis points as of the end of last year. It now stands at 390 basis points. On the other hand, neighboring Argentina saw its risk fall 26 percent to 531 points, in spite of the technical default, Wende highlights.

iProfesional assured the figure has already reached 415 points for Brazil, and fallen to 527 points for Argentina.

However, as risk rises in Brazil, its bonds’ price falls and, consequently, its returns surge. Last year, a Brazil 2025 Bond returned 4 percent per year. As of last Friday, its return was close to 6 percent. While some think this is the limit, others are arguing larger returns can be attained.

Corporate Debt

The article goes into corporate debt, which saw an even larger deterioration. A 2020 Bond issued by Banco do Brasil, a bank in which the State has a majority stake, already returned 7.6 percent. Meanwhile, Itau Unibanco Holding SA (ADR) (NYSE: ITUB) closed the year with a 6.3 percent return.

The author pointed out that these levels of fixed rent are unprecedented in Brazil, at least in the last decade. Wende continued, "Petrobras' case is even more significant. The company’s access to the market was directly impacted by the scandals surrounding the management over the past years. A short bond, which expires in 2018, has a return of 7.9 percent. However, the return surpasses 8 percent for bonds beyond 2020."


Related Articles (ITUB + PBR)

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Posted-In: argentina Banco do BrasilNews Bonds Emerging Markets Global Markets

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