The yield on the Brazilian 10-year government bond soared to 14.9%, approaching the March-2016 high of 15.3% touched on January 2nd, as growing concerns of unsustainable deficit spending by the central government triggered a surge in the risk premium for Brazilian debt and drove the Brazilian central bank to issue aggressively hawkish forward guidance. Spending disputes in the central government indicated that policymakers are unlikely to budge in expansionary fiscal policy, shortly after failing to meet initial deficit targets from the latest budget measures. This was lastly underscored by gross debt widening to 78% of GDP in November from 74% one year prior. The greater risk premium in government bonds was magnified by the impact of foreign investors closing their positions to prevent losses from a depreciating real, adding to the increase in yields. Further, the inflationary pressure from high spending drove the BCB to signal 200bps in rate cuts in their two upcoming meetings.
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