Brazil’s National Treasury held an extraordinary repurchase auction on Monday, the first trading session after Luiz Inácio Lula da Silva won re-election. The offer covered up to 15 million NTN-F bonds maturing in 2031, 2033 and 2037, with a nominal ceiling of 15 billion reais. The auction is meant to contain volatility and ensure liquidity in the futures interest rate market.
The same morning the Ibovespa opened down 16 percent, falling to about 170,000 points from roughly 200,000 at Friday’s close. The B3 triggered a circuit breaker that halted trading, which resumed at 10:35. The exchange said the previous circuit breaker had come during the covid-19 pandemic in 2020.
Banks and brokers take heavy losses
Shares of Banco do Brasil fell 31.35 percent at about 10:54 Brasília time, while BTG Pactual dropped 37.36 percent. B3 shares hit a low of 47.91 percent down at 11:00. Bradesco and Itaú also fell sharply, by roughly 23 and 15 percent respectively in Brazil.
Their American depositary receipts were weaker still before the New York open. Itaú ADRs were down about 26 percent and Bradesco ADRs about 29 percent. The circuit breaker has been activated 23 times since it was created in 1997.
Cost of the buyback
The bonds carry a 10 percent coupon, which is below current market rates, so they trade at a discount. The actual cost of the operation should therefore fall below the nominal ceiling. Participation is restricted to accredited financial institutions.
Also Read
JP Morgan cut its recommendation on Brazilian real and public bonds from overweight to marketweight after Lula’s victory. Flávio Bolsonaro had won the first round and had lifted asset prices before the runoff.
Related: Brazil's prefixed bonds recover ground lost since election first round
Source: National Treasury
