Rising interest and inflation raise the cost of public debt

The persistence of high inflation and the rise in interest rates are having a negative impact on government spending on public debt management. In October, there was a deterioration in the cost of issuing Brazilian public bonds, rising from an average rate of 6.9% per year to 7.5% per year, informed the National Treasury this Wednesday (24).

Motivated by a significant amount of bond redemptions, the stock of federal public debt dropped by 1.29% in October. The total went from BRL 5.443 trillion in September to BRL 5.373 trillion at the end of last month, a reduction of BRL 70 billion.

In the month, there was a total redemption of BRL 272.3 billion in bonds, the second largest in the historical series started in 2004, second only to the volume observed in April this year (BRL 330 billion). The volume of issuances was R$146.4 billion. As a result, the balance was a net redemption of R$125.8 billion.

This movement is explained mainly by the large volume of fixed-rate securities that matured in October, a total of R$ 268 billion, while issuances of these same papers totaled R$ 45 billion in the month.

According to the general coordinator of Public Debt Operations, Luis Felipe Vital, the rise in the cost of issuing bonds is related to factors that weigh on debt indexes. As government bonds are paid linked to inflation and the Selic rate, in addition to being impacted by market interest, the effect of changing these indicators on the cost of debt is direct.

“The raise [no custo de emissão] is answered by the movement of interest, not only of the Selic, but of the entire interest curve. This contributes to the increase in the average cost of emissions,” he said.

The federal government’s public debt is the indebtedness contracted by the National Treasury to finance expenses and cover the budget deficit, in addition to rolling over the debt.

The government issues government bonds that entitle the holder to a remuneration previously agreed with the holders. In times of crisis and instability, given the increased perception of risk, the market demands a higher remuneration from the government for investing in bonds.

According to the Treasury, the perception of risk observed in Brazil in October was worse than in other countries, which raised the interest rate curve.

During the period, the highlight in the fiscal area was the discussion of the PEC (Proposed Amendment to the Constitution), which limits the payment of court orders —government debts recognized by the Courts— and changes budget rules to allow for more government spending. The measure increased uncertainties regarding the conduct of fiscal policy on the eve of the election year.

Regarding the public debt profile, there was a slight improvement in the average maturity of the bonds, with an extension from 3.83 years in September to 3.97 years in October.

In October, the participation of foreigners in the Brazilian public debt increased, going from 10.1% to 10.5%.

The Treasury’s liquidity reserve to face upcoming bond maturities and redemptions, in turn, stood at R$1.011 trillion, 10.4% lower than the previous month.