Brazil’s bond market could be an ‘oasis’ for some investors as Trump ramps up tariff threats

Brazil’s government bonds could become an “oasis” for some investors, analysts told CNBC, particularly as global trade tensions fester.

The bond market of Latin America’s largest economy is driven more by idiosyncratic factors such as fiscal policy and inflation outlook rather than by global sentiment, said Viktor Zvabo, investment director on the emerging markets debt team at abrdn. 

Brazil’s 10-year government bond yield currently stands at 15.267%, marking a more than 40% jump compared to a year ago, data from LSEG showed.

“Brazil offers one of the highest real rates of all government bond markets,” Zvabo said.

Its yields are significantly higher compared to other emerging market counterparts. For example, yields on Chile’s 10-year government bond yields are hovering around 5.939%, while Mexico’s 10-year government bond is around 9.487%.

A cocktail mix of sticky inflation and uncertainty over the Brazil’s fiscal outlook are the main drivers for the country’s high yield, especially in recent months, market watchers told CNBC.

“Over the last five years, Brazil has been at the bottom of the Latin America league table, slightly ahead only of Chile and Colombia,” said Gustavo Medeiros, head of research at Ashmore Group, an investment management firm dedicated to emerging markets. Medeiros added that Uruguay and Mexico offered the best total returns over the past five years.

Brazil, however, now appears poised to outshine its regional peers.

“Year-to-date [Brazil] is the best performing local market, as bonds retraced from c. 16% to c. 14.6%, and the Brazilian real appreciated from 6.2 to 5.8 against the dollar,” Medeiros said.

The Brazilian bond market is rather unique, with price action being dominated by local fast money, abrdn’s Zvabo said.

“This contributes to the high risk premium and the large bond market and currency moves,” he added.

“Due to this idiosyncratic nature, the central bank of Brazil’s monetary policy can and does deviate from the rate cycles of the advanced economies and even its regional peers,” Zvabo said.

Since Luiz Inácio Lula da Silva returned to the presidency of Brazil in January 2023, the country’s economy has been navigating a complex set of challenges and opportunities, such as the high inflation rate inherited from the previous administration. 

Lula has embarked on substantial spending programs, which raised questions about the sustainability of the country’s public debt. Brazil’s public debt as a percentage of gross domestic product (GDP) currently stands at 76.1%.

Adding to its idiosyncrasy, market watchers told CNBC that they deem Brazil to be relatively insulated from global trade rifts given its moderate trade ties with the U.S.

The threat of protectionist trade policies from the U.S. has negatively impacted sentiment for many emerging market assets, but Brazil is unlikely to be a primary target in U.S. President Donald Trump’s trade war, according to Noah Wise, Allspring Global Investments’ senior portfolio manager for the plus fixed income team.

Brazilian assets have seen a recovery so far in 2025, with the currency strengthening over 4% against the greenback since the start of the year. The Brazilian stock market has also made progress, with the Ibovespa rising over 12% year-to-date, according to data from LSEG.

Wise said he has started to add Brazilian government bonds back into his portfolio following its “significant performance” in recent months, after previously reducing allocations to Brazilian government bonds by over 50% in 2024 when the country’s fiscal situation deteriorated.

As the market spotlight turn to tariffs and geopolitics, Brazilian assets’ high carry and relatively low chance of getting hit by U.S. trade policy make them attractive in the near term, said Ning Sun, State Street Global Markets’ senior emerging market strategist.

The Brazilian bond market is proving “very uncorrelated” to all other bond markets, said George Efstathopoulos, portfolio manager at Fidelity International. 

“Brazil local currency bonds could very well be an ‘oasis’ for Brazil-based investors especially, who don’t have to worry about FX risks,” Efstathopoulos said.

Local investors can get high nominal yields that far eclipse inflation levels but also competitive returns, Efstathopoulos told CNBC. However, for overseas investors, the foreign exchange risk is real, especially given the large depreciation last year, the portfolio manager added.

“We believe the rewards compensate more than adequately for the risk,” said Zsolt Papp, JPMorgan Asset Management’s investment specialist for emerging markets debt.

“Gaining access to the Brazilian government bond market through actively managed funds, offers investors diversification of return sources and active risk management,” Papp said.