On the road to the presidential election, the Treasury "shields" the public debt.

Brazilian government debt managed in the domestic market is around R$ 8 trillion and is not expected to stabilize anytime soon, maintaining warning signs and criticism of fiscal policy that contaminates asset prices due to the perception of constant risk. The government was, is, and will continue to be the country's largest debtor, with superlative expenses – the largest of which is interest payments.

Interest payments are the "Achilles' heel" of public accounts, with extraordinary and ever-increasing figures. In ten years, interest expenses – always for twelve months up to August – have more than doubled. In 2016, the amount reached R$ 418 billion. In 2025, it will reach R$ 950 billion. The need to maintain stubbornly high interest rates to control inflation is exacerbating this problem .

But this hefty figure could also be lower if the government demonstrated a commitment to stabilizing the debt, which, as a proportion of GDP, has already risen 4.6 percentage points, from 72.9% at the beginning of Lula's third term to 77.5% in August of this year. And, BTG Pactual projects, it could end 2026 above 82%. An estimated increase of more than 10 percentage points in just four years.

It is a fact that the refinancing of marketable debt is proceeding smoothly, albeit at a very high cost – calibrated by the Selic rate at record highs – and contracted for the long term. However, there is no guarantee of a smooth ride in 2026, depending on the course of the election campaign and the "score" that will emerge from the results at the polls.

However, taking advantage of favorable market conditions, the Treasury began to "shield" the debt. It expanded its "liquidity cushion" to approximately R$ 1.134 trillion – a figure that is expected to reach R$ 1.2 trillion by the end of 2025, according to estimates by Eytse Estratégia.

Sérgio Goldenstein, founder of Eytse, former head of the Open Market Operations Department at the Central Bank and one of the country's leading experts on public debt and interest rates, reminds NeoFeed that the "liquidity cushion" ended 2024 at R$ 860 billion. "This year, the cash reserves were recovered," he says.

"From January to August, the Treasury carried out a net placement of R$ 277 billion in government bonds, creating a 'cushion' that should end the year at around R$ 1.2 trillion. This will allow for greater flexibility in debt management next year, should market volatility prevail and the risk premium increase if the outlook for Lula's reelection in October leans towards victory," notes Goldenstein.

"If the outlook leans towards the opposition, risk premiums will decrease, and for a simple reason: economic agents, not just market agents, believe that an opposition government would have a greater commitment to balancing public accounts," he adds.

With its intense and proactive actions, the Treasury will have the option, in 2026, of not putting pressure on the market, according to the expert. In practice, this situation will already be configured in this last quarter of low bond redemptions. The major maturities have already occurred throughout the year, reports Goldenstein, who warns about the investors' appetite for government bonds that enabled the institution's energetic action.

Investor appetite

"The increased demand for government bonds was not a result of the fall in the risk premium, nor was it due to the fundamentals of our economy, since the fiscal situation remains very poor . The demand occurred thanks to attractive bond prices and, especially, the benign external scenario, marked by the global fall in the dollar and US Treasury yields," says the expert.

And it continues: "This combination strengthened the real, helped slow down the IPCA (Brazilian consumer price index), and provided some reduction in inflation expectations, although they remain far from the 3% target ."

Goldenstein acknowledges that the Treasury ended up putting pressure on the yield curve with its recent placements, including longer-term bonds and real interest rates above the historical average. But that's not all, the economist points out. Extending maturities with high rates contracts a strong fiscal cost over an extended period, thus exacerbating uncertainties regarding fiscal policy.

At this moment, it is premature to consider that the management of public debt will be a walk in the park in 2026, Goldenstein points out. He believes that investors' appetite for government bonds will be driven by a set of factors: how benign the external scenario will be; when the Central Bank will begin reducing the Selic rate and what the 'budget' for cuts will be; and the trajectory of the risk premium, which he believes will possibly be the most relevant factor affecting investor interest.

The expiration of Provisional Measure 1,303, which was not voted on Wednesday, October 8th, and therefore lost its validity, is, according to Goldenstein, good news. Among other aspects, the MP did not alter a large part of the exemptions for private securities and unified the taxation at 18% for other assets, thus eliminating the "staircase" of rates from 22.5% to 15%.

According to him, the provisional measure widened the tax asymmetry – favoring tax-exempt bonds at the expense of government bonds – and made it more difficult to extend the maturity of public debt. However, competition between tax-exempt assets and government bonds already exists, the economist points out.

“Even incentivized debentures are traded below the rates of NTN-B bonds – securities linked to the IPCA [Brazilian inflation index] – even though private securities, in theory, offer greater credit risk than public securities,” observes the economist, for whom the asymmetry has only stopped becoming even greater. But it continues to represent a problem for debt management by the Treasury, given the growing competition from IPCA-indexed debentures, limiting the space for NTN-B offerings.

Goldenstein believes the focus now turns to what measures the government will seek to implement to compensate for the rejection of Provisional Measure 1,303 , which was originally intended to guarantee revenue of R$ 20.87 billion in 2026. This figure is crucial for meeting the fiscal target, which, according to the 2026 Budget Guidelines Law, is a surplus of 0.25% of the Gross Domestic Product – something around R$ 34.3 billion.