On Credit: Perspectives for the Local and International Credit Market

The new quarterly edition of On Credit provides updates on the global credit market from our experts. For Brazil, Vanessa Müller from the Global Private Investment Specialists team analyzes the recent behavior of credit spreads, especially those related to infrastructure debentures.

Presented by Alejandro Estevez-Breton, Chief Fixed Income Strategist, and Marcelo Menusso, Chief Credit Strategist, the international video explores the resilience of economic activity and the labor market in the U.S., the positive trends in Q3 2024 earnings, and how political uncertainty following the U.S. elections could affect fixed income markets and our portfolios.

Check out the video highlights.

• The nominal levels of fixed income asset returns remain attractive with the Selic rate heading towards 1% per month and pre-fixed rates at 13% per year or indexed to the IPCA above 6.5% per year.
• In the current scenario, the private credit market remains resilient, with emphasis on direct assets and funds with income tax exemption. However, although the inflow into credit funds remains positive, we have observed a slight slowdown in recent months.
• In primary offerings, we have seen the limits of spreads being tested, as issuances with very low spreads and longer terms were not successful and ended up partially with the coordinating banks. This movement happens from time to time in the market. We believe this is a natural reflection of stabilization after a period of more intense flows. For now, we notice an increase in spreads compared to the previous quarter, but still very subtle.
• In the incentivized debenture market, however, we have an additional factor. Considering all the fundraising already carried out by these Infrastructure funds, the demand for tax-exempt debentures remains significant and should continue for a considerable period.
• An interesting novelty that came into effect on November 1st this year was Resolution 179 from the Securities and Exchange Commission (CVM). The new rules require financial intermediaries to disclose the compensation received for the offering of securities and inform about potential conflicts of interest. These changes aim to make the Brazilian market more transparent, solid, and reliable, aligned with the best international practices.

For more details, watch the full video:

• Since August, economic activity and the labor market in the U.S. have shown positive dynamics, which, along with political uncertainty over tariffs and immigration, have raised U.S. Treasury yields. Trump's promises of deregulation, lower taxes, and restrictions on imports and immigration create uncertainties that lead investors to demand higher yields.
• The political uncertainties of the Trump administration are raising bond yields. The U.S. 10-year Treasury is around 4.4%, compared to 3.8% at the beginning of the year. This results in higher yields in U.S. and Latin American credit, with U.S. investment-grade yielding 5.2% and high-yield bonds at 7.5%. Investors now have a good opportunity to invest in high-quality credits.
• In the third quarter of 2024, 75% of companies reported positive earnings surprises, with an estimated growth of 5.4%. Resilient economic growth and the labor market suggest sustained earnings growth until 2025, but political uncertainty could increase Treasury yields, potentially affecting credit and equity markets.
• Depending on Trump's appointments to the economic team and new legislation, the Fed may limit rate cuts. In terms of credit portfolio management, our position is constructive due to high yields, with attention to low spreads. We have slightly increased the duration, focusing on sovereign and investment-grade bonds, especially in the 5 to 10-year maturity range.
• Sector-wise, we like finance and basic materials in developed and emerging markets, and the communications sector in developed markets. We are cautious about the non-discretionary consumer sector in emerging markets, but credit fundamentals are improving.
• We will continue to monitor the markets, which present an interesting combination of high yields, tight spreads, and good credit fundamentals.

For more details, watch the full video: