Without clarity on the Fed's next moves, caution is warranted.
At a moment when American government bonds are offering their highest yields in nearly two decades, Brazilian fund managers are choosing to look away — not out of indifference, but out of a deeper reading of risk. The cost of currency hedging, the opacity of Federal Reserve intentions, and the quiet abundance of opportunity in domestic and emerging markets have combined to make the obvious trade feel like a trap. In the long human story of capital seeking safety and return, this is a chapter about the difference between a number on a page and the reality of deploying money in an uncertain world.
- US Treasury yields have reached their highest point since 2007, creating a gravitational pull that Brazilian managers are actively resisting.
- Currency hedging costs and Federal Reserve unpredictability are eroding the real returns available to reais-denominated investors, turning an attractive yield into an expensive illusion.
- Some managers are pivoting toward Colombian and Mexican corporate bonds, where credit risk premiums appear mispriced relative to underlying fundamentals.
- The domestic Brazilian fixed income market — stabilized after the Americanas scandal shock — is drawing the most conviction, with incentivized debentures and selective high-yield corporate debt offering compelling risk-adjusted returns.
- The broader question hanging over global allocation desks is unresolved: as rates rise, the old hierarchy between stocks and bonds is being rewritten, and no one yet knows the new rules.
American Treasury bonds are paying their most attractive yields in sixteen years, yet Brazilian fund managers are largely unmoved. The appeal exists on paper — but for managers operating in reais, currency hedging costs consume much of the gain before it arrives. More troubling is the uncertainty surrounding the Federal Reserve, which has raised rates to between 5.25 and 5.50 percent to cool inflation, only to find the economy stubbornly resilient. Without a clear signal of where rates are headed, caution feels like discipline.
Leonardo Ono of Legacy Capital describes the Fed as hostage to contradictory data, offering no anchor for conviction. Marcelo Pacheco of BB Asset raises a structural concern: yields have climbed high enough to force a genuine competition between corporate bonds and equities — a question that simply did not exist in the era of near-zero rates.
Some managers are finding their alternative in emerging markets. Ibiuna Investimentos has been building positions in Colombian and Mexican corporate bonds since June — focusing on banks and Cemex in Mexico, and oil producers like Ecopetrol in Colombia. JGP has noted that Colombia's credit default swap premium over Brazil looks attractive, especially as President Petro has moderated his political stance and the country's debt-to-GDP ratio remains lower than Brazil's. Ono, however, remains skeptical — the spreads, he argues, are simply not wide enough to justify the risk.
For many, the clearest opportunity remains domestic. Brazil's credit market has stabilized since the Americanas accounting scandal rattled fund flows earlier in the year. Legacy Capital favors incentivized debentures — tax-free corporate bonds yielding up to 7 percent above inflation — which appear insulated from potential government changes to other tax-advantaged instruments. Ibiuna is eyeing a move into higher-yield domestic debt, including Guararapes, a struggling retailer whose bonds offer 8 percent above the CDI benchmark and whose refinancing timeline removes near-term pressure. JGP's Alexandre Muller sees value in companies that rarely tap debt markets — AutoBAn and TIM among them — and in resilient firms like Braskem that have weathered difficulty and carry room to recover. The conclusion, quietly shared across desks in São Paulo, is that chasing American yields is a distraction from better opportunities already within reach.
American Treasury bonds are offering their most attractive yields in sixteen years. The numbers are undeniable—after a sharp rise in interest rates over the past year, US government debt now pays returns that would have seemed impossible just a few years ago. Yet Brazilian fund managers, the very professionals you might expect to be rushing into these securities, are largely staying away.
The reason is not that the yields lack appeal on paper. It is that the appeal exists on paper only. For managers operating in Brazilian reais, the math breaks down once you factor in the cost of converting dollars back into local currency. The hedge itself has become expensive. More fundamentally, there is the matter of uncertainty. The Federal Reserve has raised rates to a range between 5.25 and 5.50 percent over the past year, a move designed to cool inflation. It has worked—inflation is declining. But the economy has refused to cooperate with the script. Activity remains resilient. Data keeps coming in stronger than expected. No one quite knows what the Fed will do next, and that ambiguity is enough to make cautious investors hesitant.
Leonardo Ono, who manages private credit at Legacy Capital, puts it plainly: without clarity on the Fed's next moves, caution is warranted. The central bank is hostage to the data, he explains, and the data is sending mixed signals. The interest rate level looks high compared to the years of near-zero rates that preceded it, but there is no anchor, no conviction about where things are headed. Marcelo Pacheco, chief investment officer at BB Asset, sees a different kind of problem emerging. Yields have climbed so high that investors now face a genuine choice they did not have before: should they buy corporate debt or corporate stock? When rates were near zero, the question did not exist. Now it does, and the answer is no longer obvious.
So Brazilian managers are looking elsewhere. Some are turning to emerging markets, particularly Colombia and Mexico. Ibiuna Investimentos has been cautiously building positions in bonds from Colombian and Mexican companies since June. In Mexico, the focus is on banks and Cemex, the cement manufacturer. In Colombia, the attention has turned to oil producers like Ecopetrol and Sierracol Energy. JGP, another major Brazilian fund house, has also noticed Colombia. The country's credit default swap—a measure of how risky investors consider it—carries a premium relative to Brazil that looks interesting right now. That premium had spiked during the more leftist campaign rhetoric of President Gustavo Petro, but has retreated as he has moved toward the political center. Colombia's debt-to-GDP ratio is actually lower than Brazil's, a fact that makes the higher premium seem like an opportunity rather than a warning.
Not everyone agrees. Leonardo Ono at Legacy Capital argues that the spreads on emerging market bonds are not wide enough to compensate for the risk. There is not enough cushion, he says. The premium is not generous enough.
For many Brazilian managers, the real opportunity lies at home. The domestic fixed income market has already seen spreads tighten, but it carries less uncertainty than foreign markets and benefits from favorable technical conditions. The wave of redemptions that hit Brazilian credit funds earlier in the year—triggered by the Americanas accounting fraud scandal—has passed. Ono does not expect similar shocks in the coming months. Legacy Capital is particularly interested in incentivized debentures, a type of Brazilian corporate bond that offers tax-free returns to individual investors. These currently pay up to 7 percent annually plus inflation adjustment. With the government considering taxes on dividends and potentially eliminating another tax-advantaged instrument, these debentures look protected.
Ibiuna is also bullish on the local market. After allocating to safer, investment-grade bonds, the firm is now evaluating a shift toward higher-yielding, riskier debt and mid-range options. Guararapes, a retail company that has struggled this year, caught their attention—not despite its sector troubles, but because the company faces no urgent need to refinance debt soon and its bonds offer 8 percent above the CDI benchmark rate. Alexandre Muller at JGP sees value in companies that rarely issue debt, creating scarcity value, like AutoBAn and TIM. He also likes large, well-positioned firms that have endured difficult periods and now have room to improve—Braskem among them. The calculus is clear: why chase American yields when the risk-adjusted returns look better closer to home?
Notable Quotes
The Fed is hostage to the data, and the data is sending mixed signals. There is no anchor, no conviction about where things are headed.— Leonardo Ono, Legacy Capital
Yields have climbed so high that investors now face a genuine choice: should they buy corporate debt or corporate stock?— Marcelo Pacheco, BB Asset
The Hearth Conversation Another angle on the story
If US Treasury yields are at their highest since 2007, why wouldn't Brazilian fund managers jump at that opportunity?
Because yield alone is not the whole story. Once you convert dollars back to reais, the hedging costs eat into those returns. And there is the Fed problem—nobody knows what comes next.
But couldn't that uncertainty resolve itself soon? Wouldn't waiting just mean missing out?
That is the gamble. But these managers are paid to be cautious. The Fed is reacting to data day by day. Inflation is falling, but the economy is still strong. That contradiction is paralyzing.
So they are moving to emerging markets instead. Is Colombia really safer than the US?
Not safer, exactly. But the risk premium there has widened for political reasons, then narrowed again as the president moved toward the center. Now it offers better compensation for the risk than it did before. It is a different kind of opportunity.
And Brazil itself? Why would they prefer their own market when the world is offering 16-year highs?
Because they know Brazil. The technical conditions are favorable right now. The panic that hit earlier in the year has passed. And there are specific securities—tax-advantaged debentures, companies with scarcity value—that offer real returns without the uncertainty of betting on the Fed.