NEW YORK, June 5 (IFR) - The Brazilian government's decision
this week to cut a tax on fixed-income investments to zero
spells trouble for the country's global Real bond market and
will deflate the bid among foreigners for infrastructure
The government cut its IOF tax, a federal tax on financial
operations that levied 6% on fixed-income investments, in a move
that had an immediate impact on the sovereign's Global Real
The Global 8.50% Real-denominated 2024s were quoted at
96.80 early Thursday, after bottoming at 95.00 a day earlier.
They were a good seven points lower than the 104.00 level
they traded at before the IOF announcement, as investors saw
little incentive in holding a lower-yielding instrument when
they could now buy more liquid government Treasuries without the
6% tax burden.
In response, the fixed-rate NTN-F due 2023s and the
inflation-linked NTN-B due 2022s tightened about 25bp and 15bp
respectively to hit 10.20% and 4.45%.
"You don't have the 6% offshore tax so there is a huge
incentive [to buy local Treasuries]," said a Sao-Paulo based
banker. "We had a lot of offshore accounts this morning and our
sales desk was crazy buying these local instruments."
While the elimination of the IOF tax may not put an end to
Global Real issues entirely, it will certainly make a shallow
market even shallower. Leads can no longer rely on buyers who
had local accounts but bought the offshore Global Real bonds to
avoid paying 6%.
Demand will now be narrowed to investors who don't have a
local presence in the form of a so-called 2689 account and
simply require Euroclearable instruments for their portfolios.
There has always been limited momentum in the Global Real
market as the relatively small investor base could only absorb
so much supply, with each subsequent issuer seeing less and less
demand. As the buyer base shrinks, so will the incentives for
executing such trades, some bankers argue.
However, they are more ambivalent about IOF elimination and
its impact on the tax-exempt, infrastructure bonds that they
have just started touting to foreigners.
It was certainly unlucky timing for Brazilian tollroad
operator Rodovias do Tiete, which is still on the road and is
making its second attempt at placing this type of instrument
into international hands that now have less incentive to
This could in turn affect pricing dynamics, though it is
debatable whether the international bid was that strong in the
"On the margins it has a bit of an impact," said a senior
A reduction in foreign demand could be mitigated by a drop
in rates locally and a continuing bid from local retail accounts
who are exempt from both withholding and IOF taxes on such
"The impact on infrastructure bonds could be both good and
bad," said a banker at a Brazilian financial institution.
"It is good if the government paper gets more bids locally
and pushes yields down, but bad if investors prefer to invest
new money in government paper that has more liquidity, pushing
yields higher on future infrastructure transactions."
More broadly the slashing of the IOF tax was welcomed as
part of a dismantling of the unpopular capital controls imposed
several years ago as the government sought to rein in the
appreciation of the Real in the face of quantitative easing in
Since then authorities have had to deal with higher
inflation, slowing GDP growth, a weakening Real and a sharp
reduction in capital, encouraging them to reverse earlier
A total of 75bp in cuts over the last two Copom meetings has
underscored the central bank's seriousness about tackling
inflation and the dropping of the IOF tax is seen as a return to
more orthodox policies, say analysts at Ashmore.
As a result, Ashmore expects foreign participation in the
local Treasury market to rise above the current 14.5% - a low
level versus other emerging markets. In Peru and Mexico, for
example, it is over 50%.
"Overall this is good for Brazil. The central bank's 50bp
increase last week and this measure shows a seriousness about
the economy," said a Sao Paulo-based banker said.
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