Brazil Is Back to Pre-Junk Levels as Swaps Traders Bet on Temer

  • Country’s credit-default swaps post biggest drop in world
  • Traders are optimistic Temer can revive Brazil’s economy

Brazil is winning over derivatives traders as Acting President Michel Temer seeks to repair the nation’s finances.

The cost to hedge against losses in Brazil’s bonds with credit-default swaps has tumbled by almost a third in the past six months, the biggest drop among the world’s major economies. Prices of the swaps are also now back to levels that prevailed before S&P Global Ratings cut the country’s rating to junk in September.

The turnaround is part of a rebound in Brazil’s financial assets this year fueled by the removal of President Dilma Rousseff from office while she faces an impeachment trial. Since taking the reins last month, Temer has proposed spending caps to help shrink a near-record budget deficit and struck a deal to ease a fiscal crisis roiling Brazilian states amid the longest recession in more than a century. 

“The improvement in expectations around new economic measures is significant,” said Leonardo Monoli, a partner at Jive Asset.

Still, not everyone is convinced the new government will be able to stem the deterioration in Latin America’s biggest economy.

“I am rather skeptical about what this government can achieve,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners, which manages $211 billion. “Specifically on the outlook for fiscal reform, I indeed think that investors are overconfident.”

Gross domestic product will contract 3.5 percent this year, according to analysts’ estimates, after shrinking 3.8 percent in 2015.

The central bank said Friday that the economy has strong fundamentals to face the fallout from the U.K.’s vote to leave the European Union, citing Brazil’s foreign reserves. The real fell just 1.1 percent that day, holding up better than most major currencies.

“‘Dilmexit’ trumps Brexit,” Monoli said.

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