FX.co ★ Brazil Yields Fall on Tighter Election Race Prospects

Brazil’s 10-year government bond yield declined to 14.7%, retreating from the near one-month high reached on August 14. The move was driven by expectations of a tighter presidential race and broad-based weakness in the US dollar. Financial markets generally regard Senator Flávio Bolsonaro as more fiscally conservative than President Lula, especially at a time when high domestic interest rates are already constraining economic activity.

Political developments have reinforced speculation about a potential shift in government and economic policy. An investigation into alleged leaks involving Lula’s son, alongside indications that Flávio is closing the gap with Lula in hypothetical runoff scenarios, has sharpened these expectations. On Monday, a BTG/Nexus poll showed Lula and Flávio in a statistical tie in a possible second-round matchup.

The softer US dollar further improved the global backdrop for Brazilian fixed-income assets. Even so, US Treasury yields stayed elevated, despite the US Treasury’s decision to increase the cap on long-term bond buyback operations.