Fiscal Risks Distort Brazilian Swaps to Price In Rate Hikes
- Brazil’s CPI breakevens at highest in one year on fiscal woes
- Swap rates price in interest rate hikes starting in September
This article is for subscribers only.
Mounting skepticism over Brazil’s ability to control its fiscal deficit has triggered such sudden changes in investment positions that it has distorted the country’s swap rates market.
Swaps have not only priced out any chance of further interest rate cuts, they now imply the key rate will rise 65 basis points to 11.15% by year end. The central bank has given no indication it will raise rates anytime soon — in fact, it left the door open to cutting borrowing costs when it meets next week. Economists expect the Selic to fall to 10.25% by the end of the year.