Brazil Jacks Up Bond Tax, Again

Brazil has again hiked the IOF tax for fixed income investments, to 6% from 4%, in a move that analysts say will dent bonds and FX. Brasilia is also indicating that it will do more to stem the unprecedented inflows of portfolio money seeking relatively high returns in the local bond market. “While markets elbowed the first hike to 4% only 2 weeks ago, this move hits the markets with a considerably more fragile technical position,” says Barclays, which sees a threat to BRL and a sell off in the long end of the local curve. On top of 45bp-35bp in additional yield required to compensate for the IOF jump, it also expects the market to price additional risk premium in the curve to reflect fears of even higher IOF, or other measures, in the future. The IOF tax on BM&F margins will rise to 6.00% from 0.38%. The raise follows an increase to 4% from 2% earlier this month, while the rate for equity inflows remains 2%. “The measures should influence FX and fixed income markets negatively in the coming days,” says Barclays. “This is a bit more comprehensive than just raising the IOF tax in the past as it targets foreigners’ leveraged positions,” says Standard Chartered. However, it adds that the impact will likely be temporary. “The fact remains that Brazil has the highest interest rates in the world, and coupled with the likelihood of further quantitative easing from the Fed and possibly the Bank of England, global liquidity will look to Brazil and other places for yield,” says Standard. “Implementing controls is really just treating the symptoms which can have temporary benefits but does not resolve the underlying issue,” it adds.