Bond Bulls Love Brazil But S&P, Moody’s Still Have Doubts

  • Debt is trading at levels before country lost investment grade
  • Fitch, Moody’s and S&P have negative outlooks on Brazil rating

Bond investors say Brazil is becoming more creditworthy even though major ratings companies still have a negative outlook on the country.

The nation’s overseas notes have rallied in recent months amid speculation a new government will repair Brazil’s finances and kickstart economic growth. That’s caused yields to tumble to levels that prevailed in June 2015 -- three months before the nation was stripped of its investment grade by S&P Global Ratings. Moody’s Investors Service and Fitch Ratings followed suit in the ensuing months.

Brazil’s bond yields probably will continue falling as newly minted President Michel Temer seeks to win support for measures to reduce the nation’s budget deficit, according to Loomis Sayles & Co. and Invesco Advisers Inc. Temer was inaugurated as president on Wednesday, after Dilma Rousseff was impeached for allegedly bypassing Congress to finance government spending.

“I expect Temer’s government to pass the much-needed structural reforms on the fiscal side,” said Bianca Taylor, a Boston-based senior sovereign analyst at Loomis Sayles, which oversees $240 billion of assets. “Markets believe fundamentals will continue to improve.”

Temer’s ability to win congressional approval for budget measures will be a key element driving Brazil’s credit outlook for the next two years, Moody’s said in a Sept. 1 statement. Temer, who was acting president while Rousseff was on trial, has proposed spending caps in a bid to bolster Brazil’s finances.

“Congressional approval of the proposals will require political consensus, which is far from guaranteed,” Moody’s said in its statement.

Brazil’s real declined 0.2 percent to 3.2634 per dollar as of 10:33 a.m. in Sao Paulo.

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