Brazil's stock of Treasury notes and bonds in circulation rose to an all-time-high in September from the prior month, reflecting a surge in debt-servicing costs locally, the National Treasury said this week. The amount of notes and bonds denominated in reais rose 0.6 percent last month to 1.534 trillion reais ($906 billion) last month, the treasury said in a statement.
In August, federal debt had jumped about 1 percent, after rising borrowing costs outweighed efforts to pay down maturing securities. The data underscores the rapid growth in domestic debt issuance spurred by a surge in government spending ahead of the October 31 presidential election. Last month, the treasury paid investors 10.7 billion reais in interest but redeemed 890 million reais worth of maturing notes, the statement said.
Massive sales of debt to help replenish the capital base of state development bank BNDES and fund key infrastructure programs have added pressure to Brazil's overall debt burden this year. A government decision this month to raise the so-called IOF tax on purchases of local bonds by foreigners could make it harder for the treasury to refinance its maturing obligations - probably leading to further sales of notes and bonds, analysts said.
Finance Minister Guido Mantega said the measure aimed at easing inflows into the fixed-income markets that were stoking a rally in the currency. The government has boosted the tax to 6 percent from 2 percent this month, helping momentarily contain gains in the real.
Yet, The treasury said that move was not having much impact on the federal government's liability management strategy. "The introduction of the IOF tends to have a more significant impact on short-term investors. The trend continues to be for a gradual and growing participation of foreign investors in financing the public debt," said the co-ordinator of public debt at the Treasury, Fernando Garrido.
LESS FLOATING-RATE DEBT Investors are concerned that more debt could be sold to help replenish the government's sovereign wealth fund's coffers - and use the proceeds to weaken the currency. Some analysts fear the treasury could find it even more difficult to finance much-needed long-term investment, since foreigners could ask for a bigger premium to hold long-term Brazilian bonds to compensate for a rise in the tax.
The share of fixed-rate bonds rose to 37.53 percent of total emissions this year from 36.05 percent in August, while the share of inflation-linked bonds increased to 28.12 percent from 27.98 percent. The proportion of securities indexed to the central bank's Selic lending rate eased to 32.76 percent from 34.34 percent.