Brazil's National Treasury raised R$ 17.7 billion in an extraordinary auction held this Wednesday, September 3rd. 1.5 million NTN-B bonds were sold, maturing in 2040, 2050, and 2055. With demand 50% higher than supply, all bonds were sold, with rates close to IPCA + 7.4% per year.
These bonds are considered off-the-run , meaning they are not part of the most actively traded benchmark series ( on-the-run ). Because they have lower liquidity, they are usually traded at a rate premium. Due to their relative scarcity, the size of the offering surprised the market, putting pressure on prices of longer maturities after the auction announcement, which was released outside the Central Bank's agenda, after the market closed on Friday, August 28th.
Economists and managers consulted by NeoFeed assessed the auction's outcome as positive. "The Treasury managed to place a large amount. The auction was good and generates a positive perception for future auctions," said Nicolas Borsoi, chief economist at Nova Futura.
The Treasury had already signaled that it might hold extraordinary auctions throughout the year to provide liquidity, but the operation ended up taking the market by surprise. "The amount offered was significant, but the demand was even more surprising," said Claudio Pires, managing partner of MAG.
According to Ian Lima, fixed income manager at Inter Asset, the decision behind the auction may be linked to the need to provide liquidity to the market, given the unusual volume offered in the longer maturities. "There must be some demand from dealers to alleviate their technical positioning, because they were more short," he stated.
In market jargon, being "short" means that dealers offer securities even without having them in their portfolio, to meet the demand of long-term investors. To honor these sales, they need to repurchase the securities on the market or resort to borrowing, which puts even more pressure on the market when there is little supply. In these situations, an extraordinary auction helps to alleviate the technical imbalance, injecting new securities and reducing the risk of illiquidity.
“It seems to us that it was a request from some participant or group of market participants, and the Treasury deemed it appropriate to meet this demand, avoiding the risk of the volume causing distortions in the yield curve,” stated Pires, from MAG. According to him, the bonds offered had not been placed for a long time and, given the size of the lot, it is likely that this participant would have had difficulties buying them on the secondary market.
Although he also sees technical motivations for the high demand, Gabriel Mello, macro manager at AZ Quest, believes that the extraordinary auction showed there was pent-up demand at specific points in the curve. "Despite having this more technical motivation, there was also final demand, given the high volume of issuance."
Mello highlighted that, in recent weeks, there has been an increase in demand for long-term bonds, which has generated distortions in the yield curve. "Other players probably took advantage of the opportunity to allocate to long-term NTN-Bs, and the Treasury met the additional demand."
NTN-Bs have accounted for approximately 20% of government bond issuances in the last 12 months, totaling around R$ 287 billion. The majority of the issuance has been concentrated in bonds linked to the Selic rate (LFTs), which represented 45% of the total issued during the period.
Fixed-rate LTNs accounted for 27%, while fixed-rate NTN-Fs with semi-annual interest payments were around 8%.
