In May, the yield on 10-year Brazilian government bonds dropped to approximately 13.9%, marking the lowest level in five months. This decline was influenced by clearer monetary policy signals, strong external balances, and diminished trade war risks, leading investors to demand a lower term premium. Inflation in April stood at 5.53% year-on-year, aligning closely with expectations and supporting the central bank's position that the recent 50 basis point increase in the Selic rate to 14.75% might represent the peak of the current tightening cycle, potentially setting the stage for rate cuts later in the year.
On the international front, the U.S. Federal Reserve's decision to maintain interest rates at 4.25–4.50%, while indicating that inflation is stabilizing, contributed to calming Treasury yields. This development helped narrow the yield spread between Brazil and the U.S., attracting capital through carry trades. Additionally, the anticipation of upcoming trade discussions between the U.S. and China in Switzerland, along with a new trade agreement between the U.S. and the UK, alleviated concerns regarding tariffs on Brazilian commodity exports.
Further evidence of Brazil's robust external position came from a solid $8.2 billion trade surplus in April and a 3.1% annual increase in industrial production. These factors heightened the demand for Brazilian debt securities, resulting in a downward trend in long-term yields.
