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DI Swaps Continue To Build Fiscal Risk Premium Amid Lula Rhetoric

BRAZIL
  • DI Swap rates have extended their upward trajectory, with contracts expiring in Jan 2030 rising as much 28bps. Markets point to the latest remarks from President Lula as stoking the pressure on local assets.
  • President Lula comments suggested that higher revenues and lower interest rates would balance the budget and market participants remain extremely sceptical over this coming to fruition. Especially given the sharp turnaround in market pricing, which is now expecting rate hikes in 2024 following the most recent dynamic of de-anchored medium and longer-term inflation expectations.
  • Furthermore, the fact that Lula’s latest comments did not include the possibility of cutting expenditure enhances the already fragile perception regarding the government’s ability to meet this year’s fiscal targets.

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