Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

(Updated )

Analysts are finding a lot to dislike about Brazil right now. But bond investors are finding a lot to love.

Debt investors are enjoying some big returns for taking a risk on the nation late last year, and some investment firms predict the profits will keep on coming. Brazilian government bonds have gained 1.4 percent so far this month and 4.9 percent this year, according to Bank of America Merrill Lynch data. Even speculative-grade bonds of Brazilian companies have posted positive returns while similarly rated debt has fallen in the U.S. 

That flies in stark contrast with some bleak messages coming from analysts. Moody's downgraded the nation to junk in a two-step move on Wednesday. Goldman Sachs economists led by Alberto Ramos said on Wednesday that Brazil doesn't look very promising in the near term. Fitch got in on the game as well, with Latin American corporate analyst Joe Bormann saying, "The path forward looks dismal."

So what gives? Brazil definitely faces some serious fundamental problems, both economically and politically. But the nation's currency and bonds have already been beaten up so much it's hard to see how they can fall so much more.

Currency Collapse
Brazil's real suffered steep losses against the U.S. dollar last year as its economic crisis worsened.
Source: Bloomberg

That's the logic of investors including Michael Hasenstab, Franklin Templeton's well-known contrarian manager, who were piling into Brazil late last year as everyone else piled out, according to a Bloomberg News article by Natasha Doff and Paula Sambo. Prices have slumped so low that Brazil is considering buying back some of its foreign bonds, Treasury Secretary Otavio Ladeira said in an interview with Bloomberg's Mario Sergio Lima and Carla Simoes.

Brazil was one of a few distressed special situations in emerging markets "that are in crisis but appear to have a clear path for exiting the crisis over the medium term," Hasenstab wrote in a Feb. 22 post on Franklin's website.

Last year, Brazil's currency fell 33 percent against the dollar. Since Jan. 21, the real has gained about 5 percent. Last year, average yields on Brazilian government bonds rose to as high as 16.7 percent, more the 15 percentage points higher than average U.S. government yields at the time for the greatest such premium in data going back to 2006. Now, some brave investors are coming back.

Tempering Fears
Brazilian bond yields have declined since last year's peak of 16.7 percent.
Source: The BofA Merrill Lynch Brazil Government Index

To be clear, Brazil is still mired in trouble. It's a commodity-producing nation trapped in the cellar of low oil prices. President Dilma Rousseff is fighting off efforts to impeach her as she tries to raise taxes and reduce spending. Brazil’s gross debt as a percentage of its economy has jumped by almost a third in the past two years, to 66 percent.

Oh, and it's stuck in its worst recession in decades.

But bond investors had already priced a lot of bad news in last year. Now, some of them are starting to see the good again.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates return figures in the second paragraph and corrects name of Franklin Templeton manager in fifth paragraph.)

To contact the author of this story:
Lisa Abramowicz in New York at

To contact the editor responsible for this story:
Daniel Niemi at