Financial Times – Foreign investors have piled into Brazilian domestic debt since last year as spreads on the country’s sovereign bonds over comparable US Treasuries have tightened almost toinvestment-grade levels and returns on domestic bonds have become much more compelling.
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Among the most attractive have been the Brazilian Treasury’s long-term NTN-Bs, which pay interest over inflation. Foreigners have bought heavily, especially those maturing in 2045. At Treasury auctions in March, they were sold to yield inflation plus 7.5 per cent. Foreigners bought an estimated $5bn-$6bn’s worth of these and similar notes.
As became clear during last week’s sell-off, they are particularly risky bonds. One reason is that they are denominated in Brazilian reals, so they carry an obvious foreign exchange risk.
This is a risk that most investors hedge. But few have bothered to hedge the associated interest rate risk.
