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May, 2008 WASHINGTON Brazilian Federal Government Debt
Brazilian Federal Government Debt Investor Base Secondary Market Market Perspective Challenges Ahead 1
Debt Holders December, 2007 Domestic Debt Holders R$ 388 bi 33% R$ 217 bi 19% R$ 36 bi 3% R$ 481 bi 41% R$ 49 bi 4% Financial Institutions Foreign Investors Mutual Funds Pension Funds Other In a short period of time (less than 2 years) foreign investors became an important player in domestic debt market, helping to build liquidity to long term bonds. 2
Mutual Funds 100% Mutual Funds' Domestic Bonds 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% dec/03 dec/04 dec/05 dec/06 dec/07 Floating Rate Fixed Rate Inflation Linked Other During the last few years, mutual funds have considerably diversified their portifolio 3
Mutual Funds 300.000 Mutual Funds 280.000 260.000 240.000 R$ million 220.000 200.000 180.000 160.000 140.000 120.000 apr/05 jul/05 oct/05 jan/06 apr/06 jul/06 oct/06 jan/07 apr/07 jul/07 oct/07 jan/08 Refer. DI "floating rate" Multimercado "multi strategy" Multi strategy funds have gained relevance, as an evidence that investors are gradually accepting types of risks other than the floating rate. 4
Pension Funds December,2007 Inflation Linked NTN B A great deal of the demand for inflation linked bonds come from Pension Funds. longer than 10 years R$ 32.7 bi 38% Specially for long term bonds. less than 10 years R$ 53.7 bi 62% longer than 5 years R$ 1.5 bi 16% Fixed Rate NTN F less than 5 years R$ 8.1 bi 84% But, the greater part of fixed rate bonds holded by pension funds have a relatively short maturity. 5
Pension Funds 60.000 Pension Funds' Inflation Linked Bonds December,2007 50.000 40.000 R$ million 30.000 56.801 20.000 38.586 27.458 10.000 maturity term < 5 y 5y < term < 10y term > 10 y 6
Private Retirement Plan R$ billion 7
Foreign investors stance in domestic market Foreigner s Foreigner s Investors: Investors: Portfolio Portfolio level level (US$ (US$ bn) bn) 180.0 160.0 140.0 120.0 Fixed Income Equities 149.1 Foreigner s Foreigner s Investors: Investors: Distribution Distribution among among Fixed Fixed Income Income instruments instruments (R$ (R$ bn) bn) 80 60 Others Mutual Funds (FIF) National Treasury Bonds 100.0 80.0 40 60.0 42.6 40.0 20 20.0 0.0 Source: CVM Source: CVM Foreigner's Foreigner's Investors: Investors: Domestic Domestic Debt Debt Participation Participation Source: CVM and SELIC 2.6 23.3 49.2 8 R E C E N T E V E N T S Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 US$ Bn 0 Jan-08 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 R$ Bn 6.0% 5.0% 4.96% 4.0% 3.0% 2.0% 1.0% 0.0% Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08
Foreign Investors Foreign investors are more interested in long term inflation linked and long fixed rate bonds. Fixed Rate NTN F longer than 10 years R$ 5.9 bi 43% December,2007 Inflation Linked NTN B less than 10 years R$ 7.9 bi 57% longer than 5 years R$ 10.2 bi 44% less than 5 years R$ 12.9 bi 56% Foreign investors and Pension Funds are important groups of investors. They increasingly add liquidity to the market. 9
Brazilian Federal Government Debt Investor Base Secondary Market Market Perspective Challenges Ahead 10
Secondary Market P Increse in NTN-B and Fixed Rate Bonds Decrease in Floating Rate Bonds 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2003 2004 2005 2006 2007 2008 Fixed Linked (NTN-F) 0% 0% 0% 2% 9% 8% Inflation Linked 4% 3% 3% 14% 17% 14% Fixed Linked (LTN) 19% 63% 58% 54% 48% 50% Selic Linked 77% 34% 39% 29% 26% 28% 11
NTN-B Secondary Market 70,000 60,000 50,000 Millions 40,000 30,000 20,000 10,000 - Feb'06: tax exemption. Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Source: National Treasury 12
NTN-F Secondary Market 45,000 40,000 35,000 30,000 NTN-F 2017 traded volume as % of total traded volume: => 12% in 2007. => 21% in 2008. Millions 25,000 20,000 15,000 10,000 5,000 Jan'07: first issuance of NTN-F 2017. - Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Source: National Treasury 13
Bid-Ask Bid-Ask Atuação Spreads Spreads no in in the the Mercado Markets Markets of of Doméstico NTN-F NTN-F (fixed (fixed rate) rate) Indicadores and and NTN-B NTN-B (inflation (inflation de linked) linked) liquidez Fixed rate bonds bid-ask spreads were significantly tightened. Inflation linked bonds bid-ask spreads are fairly priced, in spite of increased market volatility in 2008. 0.70% 0.14% 0.60% 0.12% 0.50% 0.10% 0.40% 0.08% 0.30% 0.06% 0.20% 0.04% 0.10% 0.02% 0.00% NTN-F jan/10 NTN-F jan/12 NTN-F jan/17 2006 2007 2008 0.00% NTN-B 2010 NTN-B 2015 2005 2006 2007 2008 14
Brazilian Federal Government Debt Investor Base Secondary Market Investor Base and Liquidity Challenges Ahead 15
Secondary Market and Investor Base Pension funds, foreign investors, mutual funds and banks constitute a diversified group of investors. Growing interest for inflation linked and long term fixed rate bonds. Heterogeneous objectives and perspectives regarding federal bonds trading, what, in general, provides balanced number of buyers and sellers. 16
Fixed Rate Bond Secondary Market DI Index Funds Banks Banks Foreign Investors Multi Strategy Funds Source: National Treasury 17
Inflation Linked Bond Secondary Market Banks Mutual Funds Multi Strategy Funds Foreign Investors Banks Foreign Investors Pension Funds Source: National Treasury 18
Changes in the secondary market 2006/2007 In May 2006, following increased fears of US interest rate hikes, liquidity in the local secondary market decreased. Inflation linked notes were more negatively affected. Investors, specially foreign ones, tried to reduce their exposure by selling bonds. However there were not enough buyers of these assets. Pension funds, under investigation by authorities at that time, had limited access to the secondary market because of compliance issues. Even though bond ask prices were very attractive in the secondary market, these funds limited themselves to Treasury auctions. Noticing the lack of linkage between potential buyers and sellers, the National Treasury decided to conduct auctions in which it simultaneously issued and redeemed the same bonds (bid-ask auctions). As a result, after the third auction, the anxieties of sellers vanished. 19
National Treasury intervenes in unstable market The Brazilian National Treasury carried through, on may 24, 25 and 26, simultaneous auctions to buy and sell NTN-Bs: National Treasury considers the foreign investor an important partner to the improvement and lengthening of the public debt's composition; The interventions' guideline was providing prices' parameters to the market in a very unstable scenario; Historically, when facing strong fluctuation on market indicators, the National Treasury acts as a market stabilizer agent; The auctions' results, in terms of amounts bought and sold, confirm that the Treasury managed to bring the market back to calm levels. 24 May, 2006 25 May, 2006 26 May, 2006 Treasury s Financial Result R$ mn Treasury s Financial Result R$ mn NET ISSUANCE Treasury s Financial Result R$ mn Total 2006 (144.67) (144.67) 2007 (23.03) (23.03) 2008 0.67 44.44 45.10 2009 48.33 (315.42) 42.54 (224.54) 2010 (303.65) 75.34 (656.78) (885.09) 2011 207.79 (26.44) 185.62 366.97 2015 (24.20) 191.32 (256.89) (89.77) 2024 (283.93) (227.43) 19.41 (491.95) 2035 (168.44) 22.00 116.82 (29.61) 2045 (542.93) (121.88) 489.97 (174.83) Total (1,066.35) (425.54) (159.53) (1,651.42) Buy and Sell Auction`s Spreads NTN-B Auctions 2005 2006 1 Issuance 23.47 31.47 Redemption (2.08) (4.53) Early Redemption* (8.70) (8.97) Exchange 27.28 46.23 Buy and Sell Auction - (1.65) Issuance - 2.33 Early Redemption - (3.98) Net Issuance 39.96 62.56 1 Until May 2006 * It includes the NTN-B received as payment on the Exchange auctions 20
The The National National Treasury Treasury intervenes intervenes to to stabilize stabilize markets markets In August 2007, during the days of spiking volatility caused by the subprime crisis, the National Treasury did not intervene In 2006 there was need for an intervention to fix the linkage between buyers and sellers of public bonds. In 2007 such an intervention was not needed, given the greater development of the secondary market. Market was supported by the extension and diversification of the investor base. While foreign investors sold their assets in order to face losses in other countries, local pension funds and banks were able to provide fair bids. The banks that were short were specially willing to buy bonds and square their positions. NTN-B NTN-B 2045 2045 in in 2006 2006 and and 2007 2007 10.0 9.5 9.0 National Treasury Spread Auctions: 23, 24 and 25/may. % 8.5 8.0 7.5 7.0 6.5 6.0 5.5 Subprime Crises Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 (NTNB 2045) 2007 (NTNB 2045) 21
Developing Regulatory Structure in Line with Debt Management Objectives Federal bonds held by pension funds and investment institutions can be classified as: I Trading II Hold to Maturity Pension funds regulator created incentives to the electronic dealing, in accordance with National Treasury efforts to promote it. Such assets can be also used for lending. Though, detailed regualtion is still needed. National Treasury is working with market participants towards that. 22
Trading Trading on on Electronic Electronic Plataforms Plataforms New rules for dealers: Incentives for providing bid-ask spreads in specific intervals at market opening and close in electronic trading systems.
Electronic Electronic Trading Trading of of Public Public Bonds Bonds Real time effective prices from electronic platform are available on Bloomberg Soon on Reuters
Measures for the secondary market Government measures to develop the secondary market Concentration of maturities; Meetings with market participants such as pension funds and asset managers; Income tax exemption for foreign investors; Implementation of mechanisms that permit short selling of government bonds (under development; market currently makes use of Central Bank s longer term repos) Incentives for transparency: bond price information systems and electronic trading systems. 25
Brazilian Federal Government Debt Investor Base Secondary Market Market Perspective Challenges Ahead 26
Challenges Ahead Market structure still strongly driven by the floating rate heritage (immediate liquidity perspective) Market potential Market size Heterogeneous perspectives of investors already existent Balanced composition of portfolios still to be reached Economic stability 27