Brazil's Treasury projected that the country's federal public debt could increase by up to 16% this year, with bonds tied to the benchmark interest rate potentially comprising over half of the total debt. This situation exposes Brazil to the central bank's efforts to control inflation, resulting in higher debt servicing costs.
The Treasury's annual financing plan anticipates the debt to range between 8.1 trillion and 8.5 trillion reais ($1.47 trillion) in 2025, up from 7.316 trillion reais in December. Emphasizing the issuance of both conventional and sustainable bonds to shape the Brazilian sovereign yield curve, the Treasury may utilize external operations to boost curve efficiency.
Forecasting that the portion of debt linked to the Selic interest rate may reach 48% to 52% this year, compared to 46.3% in 2024, the Treasury aims to align its debt structure with market preferences. Treasury Secretary Rogerio Ceron stated, There is no point in working against market demand, during a press conference.
While these floating-rate bonds, or LFTs, gained popularity amid market uncertainties and rising interest rates internationally, they also expose Brazil to potential cost hikes when interest rates climb. Following a recent 100 basis points hike by Brazil's central bank to 13.25%, further increases are expected to contain mounting inflation due to strong economic activity and currency devaluation.
The Treasury's objective is to reduce the proportion of LFTs in total debt to 23% by 2035. Nonetheless, Treasury Deputy Secretary Daniel Leal acknowledged that achieving this goal within a decade may be challenging. Leal also expressed confidence that the increased share of these bonds does not impede the effectiveness of monetary policy.
Starting the year with a balanced debt management strategy, the Treasury noted successful January auctions with higher volumes than previously seen, indicating a positive start to debt operations.