Brazil’s recent foray into local-currency international bond offerings was a misjudgment by all concerned. Emerging-market countries should certainly take full advantage of their new-found ability to issue debt abroad in their domestic currencies. But in some cases, just because you can do so doesn’t mean you should.
Brazil is one such country. It issued a R3.4 billion ($1.5 billion) 10-year Eurobond in September, yielding 12.5%. Despite a huge amount of hype, the issue performed badly in the aftermarket: investors that bought in at launch were soon hurting, and Brazil did nothing to bolster its spotty reputation in the primary debt capital markets.
Many of the investors were hedge funds that had been expecting the bond for some time. That gave them the opportunity to sell short the Brazilian domestic curve in advance of buying the new long-dated paper. In stark contrast to similar deals out of Colombia, yields on domestic Brazilian debt actually went up as a result of the issue, not down.
Brazilian institutions were also important buyers of the bond. Local investors pay income tax on Brazilian bond coupons, but Eurobonds are tax-exempt. Brazil therefore lost the effective 20% discount that it gets on all local bond issuance.