With NTN-B bonds falling, the Treasury faces a R$275 billion test. Will the market back the government?

The Selic rate cut to 14% on Wednesday, August 5th, is a certainty. However, it's impossible to predict the outcome of the major event that will occur later, testing the Treasury's determination to undertake an unusual rollover of public debt and the market's willingness to finance the government.

On August 17th, institutions and investors will face an estimated R$243 billion in NTN-B federal bond maturities, indexed to inflation, which should approach R$275 billion with the payment of intermediate interest on other NTN-B bonds scheduled for the period. This superlative amount of debt is noteworthy because the Treasury works with "towers" or concentration of maturities in order to stimulate the secondary market.

A natural impact of a bailout of this magnitude is the increased availability of resources under the daily management of the Central Bank , sterilized or withdrawn from circulation mainly through "repurchase agreements" which consist of the temporary withdrawal of money from the market with the commitment of the Central Bank to return the resources to the original holders at an interest rate – close to the Selic rate.

Just as, or even more, relevant than the "jumbo" maturity of bonds is the volume that the Treasury will be able to issue of NTN-B bonds, after several consecutive weeks of very weak demand for this asset, to the point that issuances fell to their lowest level in 10 years , as reported by journalist Guilherme Guilherme of NeoFeed .

Sérgio Goldenstein, partner and director of Eytse Estratégia, a consulting firm specializing in foreign exchange, interest rates, and government bonds – former head of the open market operations department at the Central Bank and former director of fixed income, foreign exchange, and derivatives at BM&F Bovespa (now B3) – explains that the maturity schedule is deliberately irregular because the Treasury opts for concentration.

“High redemption amounts alternate with periods of short or non-existent maturities. The Treasury decouples the issuance schedule from the redemption schedule through pre-financing and the use of reserves or liquidity buffers to cover necessary redemptions,” the expert tells NeoFeed .

For this reason, he adds, approximately R$ 710 billion in bond maturities scheduled for the period from July to September of this year do not require an equivalent issuance in the corresponding quarter.

The liquidity buffer, to which Goldenstein refers, reached R$ 1.2 trillion in May, an amount sufficient to cover 9.1 months of public debt maturities and well above the prudential level of three months. "The balance of this buffer fluctuates with the calendar. It increases in periods of net issuance and tends to fall in months with large maturities," says the expert, for whom "the relevant risk is not the payment of maturities, but the cost and composition of the issuances."

The cost and composition of issuances may require a greater share of LFTs – securities remunerated at the Selic rate – limiting the improvement in the public debt profile pursued by the Treasury, which is reluctant to pay escalating premiums eventually demanded by the market, so as not to further pressure the yield curve and not to "lock in" a higher financing cost for an extended period.

Captive demand

Although the expected maturity of NTN-B bonds in August might suggest, due to its size, a jolt in the rollover of public debt, the redemption is anticipated, as Goldenstein points out, and the refinancing also has a captive demand.

Eytse Estratégia estimates a net demand of approximately R$ 35.7 billion, equivalent to the market purchasing around 7.95 million securities to replenish the portfolios of funds indexed to the IMA-B 5, IMA-B, and IMA-B 5+. These acronyms represent the "Anbima Market Index" family, which refers to the profitability of assets that pay real interest with maturities of up to 5 years or more.

Funds indexed to the IMA-B 5 index are expected to concentrate the largest share of the flow, with estimated purchases of around 6.94 million bonds. The main amounts for replenishment are in NTN-B bonds maturing in 2028 and 2030, with projected purchases of R$ 10.9 billion and R$ 10.4 billion, respectively.

The debt maturity in August reinforces the perception that debt denominated in federal bonds is the most important component of public debt, attracting attention and concern from economists everywhere due to its already high size and growth rate, especially as a proportion of GDP.

Most of the debt is tied to the Selic rate – set by the Copom ( Monetary Policy Committee) – which, over 12 months, leads to interest payments exceeding R$ 1 trillion. And, precisely because of its magnitude, it justifies a debate inspired by the popular expression about what comes first: "The chicken or the egg?" That is, the interest or the debt, which, in practice, feed off each other.

Over the past three months, coinciding with rising interest rates in the international market due to intermittent oil price increases and the prospect of higher inflation, the return on government bonds in general has increased. However, in the case of NTN-B bonds, investor interest has cooled.

Goldenstein, however, does not see widespread aversion to public debt. He attributes the limited demand for NTN-B bonds to a combination of factors: pressured CDI rates; already significant stock of these bonds in pension funds; lower assets of multi-market funds; competition from incentivized debentures; risk driven by fiscal and political-electoral uncertainty; and high implicit inflation rates in the returns that increase the attractiveness of fixed-income securities.