Yields on US Treasuries climbed sharply, pushing global borrowing costs higher and spilling over into emerging market debt after the 10-year yield reached 5.11 percent on Wednesday 23 and the 30-year yield rose to 5.44 percent on Thursday 24.
Spillover to Brazilian debt
The 10-year yield closed at its highest level since July 2007, while the 30-year rate reached its highest level since 2004. Markets priced in a 70 percent probability of a Federal Reserve interest rate hike in October, alongside oil trading near 100 dollars per barrel. Federal Reserve Governor Michael Barr stated that further interest rate increases may be necessary.
Brazilian government bonds felt the pressure immediately. The Tesouro Prefixado 2032 yield closed at 14.11 percent on Wednesday before advancing to 14.14 percent on Thursday morning. The Tesouro IPCA+ 2032 yield stood at 7.68 percent. Joao Arthur, CIO of Suno Consultoria, noted that higher yields in Washington force emerging markets to adjust their own terms.
Asset allocation perspectives
“If the US government pays 5 percent per year, the Brazilian government has to pay more,” Arthur said. An illustrative calculation taking a 10-year US Treasury yield of 4.95 percent per year showed an estimated net 12-month return of 2.2 percent for a Brazilian investor if the exchange rate remains unchanged.
“What is playing a much bigger role than it should is psychological anchoring,” Mohamed El-Erian, chief economic adviser at Allianz, said. Alejo Czerwonko, CIO for emerging markets at UBS Global Wealth Management, took a measured view of the development. “The current tightening cycle represents a manageable headwind, not a fundamental threat, to emerging economies and assets,” Czerwonko said.
Related: Bessent defends Treasury buybacks as yields rise
Source: Federal Reserve
