Brazil Stocks Plunge 13.9%, Bond Yield Tops 15% After Lula Wins Fourth Term

Brazil’s financial markets were rocked after President Luiz Inacio Lula da Silva secured a fourth term. Stocks and the real tumbled, while government bond yields surged, fueling concern over worsening public finances and a prolonged period of high interest rates.

On October 27, Brazil’s Bovespa index fell more than 17% intraday before closing down 13.9% from the previous session. It was the steepest drop since March 2020, when markets were hit by the Covid-19 shock. The real also slid more than 10% against the dollar during the session before ending down about 8%.

Selling was concentrated in heavily indebted companies. Retailers Lojas Quero-Quero and Magazine Luiza plunged as much as 66% and 60%, respectively, during the session. Rental-car company Movida dropped 60%, while homebuilder MRV fell as much as 45%.

Investors appear to be reacting to concern that the Lula government’s expansionary fiscal stance could prolong inflation and keep interest rates higher for longer. Persistent price pressures would raise borrowing costs for companies and erode consumers’ purchasing power.

The bond market also swung sharply. Brazil’s 10-year government bond yield rose 2.46 percentage points in a single day to 15.450%. At one point, the increase reached 3.398 percentage points.

The government moved to calm markets. It canceled inflation-linked and fixed-rate bond auctions scheduled for October 27 and October 29, and repurchased about 14.8 billion reais of government debt.

Private-sector debt burdens were already high. Credit bureau Serasa said about 84 million Brazilians and 9.3 million companies were delinquent on their debts as of August, both record highs.

Concern over Brazil’s fiscal capacity is also mounting. The country’s national debt stands at about 83% of gross domestic product, up more than 10 percentage points in the roughly three years since Lula’s third administration began. The International Monetary Fund projects Brazil’s fiscal deficit will reach 8% of GDP this year.

Matthew Culley, a portfolio manager at Janus Henderson, said Brazil’s economy would take a significant hit if government bond yields around 15% persist for another four years. A weaker real could lift inflation expectations and market interest rates, creating a vicious cycle that further increases the government’s interest burden.

Finance Minister Dario Durigan said Brazil would achieve a primary fiscal surplus next year, but did not present specific measures to improve the fiscal outlook.

William Foster, a senior vice president responsible for sovereign ratings at Moody’s, said pressure could build to revise Brazil’s credit outlook to negative if debt continues to rise without a credible long-term deficit-reduction plan. Moody’s currently rates Brazil at Ba1, one notch below investment grade, with a stable outlook.