These Brazil Bond Traders Playing It Safe as Impeachment Nears

Updated on
  • Lower house to vote Sunday on whether to oust Rousseff
  • Brazil's local bonds have posted the biggest gains in EM

Brazil’s Congress is on the cusp of impeaching President Dilma Rousseff, and investors from Franklin Templeton to Newfleet Asset Management aren’t taking any chances.

While some investors are paring their Brazil investments, others are resisting the urge to add to holdings amid concerns Rousseff’s ouster won’t be enough to pave the way for a government that can pull the economy out of recession. They’re worried the rally, which has helped local-currency government bonds beat all other emerging markets with a 27 percent return this year, is unsustainable because the economy is in such bad shape.

A growing number of money managers are becoming ever more cautious as the lower house prepares to vote Sunday on whether to proceed with impeachment and send the case to the Senate. While it means investors would be one step closer to the change in government they’ve wanted, their optimism is likely to come up against the hard reality of Brazil’s deep-seated problems, according to Daniel Senecal, a money manager at Newfleet, which oversees $11.5 billion. Brazil is currently mired in its deepest recession in more than a century.

“I have been surprised by how much assets have moved,” Senecal said. “I have some optimism too for some change, but if we get through it all successfully, there is still a lot of wood to chop. Brazil is probably a little on the rich side and it mostly has to do with the fact that regardless of what happens, you’ve got a lot of problems to solve there.”

On Thursday, Rousseff’s government asked the Supreme Court to annul the impeachment process in Congress and suspend Sunday’s vote. The opposition’s charges, which assert that Rousseff broke the law by trying to mask a growing budget deficit, doesn’t offer the justification needed to remove her from office, according to the government.

If the lower house votes in favor of impeachment, then a majority of the upper chamber must agree to try the president. If they also support Rousseff’s removal, she must step down for as long as 180 days as legislators debate the case. The Senate then would need support from two-thirds of its 81 members to impeach the president and terminate her mandate.

Investors who are anticipating a fast resolution may become discouraged by how drawn-out the process is likely to be, said Rodrigo Borges, head of fixed income at Franklin Templeton Invest Brasil in Sao Paulo.

“There is a possibility that traders buy the rumor and sell the fact,” he said. “There are many chapters yet post-vote and markets seem to think that Sunday would be the last one. With our defensive operation, we can obviously lose out on some movements, but we have to wait until the scenario allows better insight into how the economy will evolve. We prefer to see the dust settle.”

The real fell 1.7 percent to 3.5419 per dollar at 1:51 p.m. in New York.