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Brazil’s Bond Tax Overhaul to Create Policy Clash for Government

  • Proposal by Guedes would slap flat 15% tax on debt holdings
  • Rate hikes already fueling demand for short-term notes
Paulo Guedes, Brazil’s economy minister, in July 2019.
Paulo Guedes, Brazil’s economy minister, in July 2019.

A year after the pandemic forced Brazil to sell almost nothing but short-term debt to nervous investors, Treasury officials have been pushing hard to ratchet back up auctions of long bonds. For them, like for finance chiefs across much of the developing world, locking in long-term financing works as a safety blanket of sorts, helping protect government coffers from the vicissitudes of global markets.

So when Finance Minister Paulo Guedes proposed last month to slash the tax rate on fixed-income assets held for less than two years, it caught traders and analysts off-guard in Sao Paulo. The move, some of them quickly concluded, is in direct conflict with the government’s debt sale plans: By incentivizing the purchase of short-term securities, the legislation would sap demand for longer-maturity bonds.