5IF WJFXT FYQSFTTFE JO UIFTF QBQFST BOE QSFTFOUBUJPOT …€¦ · 5if wjfxt fyqsfttfe jo uiftf qbqfst boe qsftfoubujpot bsf uiptf pg uif bvuips t pomz boe uif qsftfodf pg uifn ps

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WASHINGTON

Brazilian Federal Government Debt

May, 2008

Ministério da Fazenda

Brazilian Federal Government DebtBrazilian Federal Government Debt

1

Investor Base

Secondary Market

Market Perspective

Challenges Ahead


R$ 481 bi41%

R$ 49 bi4%

R$ 388 bi33%

R$ 217 bi19%

R$ 36 bi3%

Domestic Debt Holders

Financial Institutions Foreign Investors Mutual Funds Pension Funds Other

Debt Holders December, 2007Debt Holders December, 2007

2

In a short period of time (less than 2 years) foreign investors became an important player in domestic debt market, helping to build liquidity to long term bonds.


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

dec/03 dec/04 dec/05 dec/06 dec/07

Mutual Funds' Domestic Bonds

Floating Rate Fixed Rate Inflation Linked Other

Mutual FundsMutual Funds

3During the last few years, mutual funds have considerably diversified their portifolio


120.000

140.000

160.000

180.000

200.000

220.000

240.000

260.000

280.000

300.000

apr/05 jul/05 oct/05 jan/06 apr/06 jul/06 oct/06 jan/07 apr/07 jul/07 oct/07 jan/08

R$ million

Mutual Funds

Refer. DI"floating rate"

Multimercado"multi strategy"

Mutual FundsMutual Funds

4

Multi strategy funds have gained relevance, as an evidence that investors are gradually accepting types of risks other than the floating rate.


Pension Funds December,2007 Pension Funds December,2007

5

A great deal of the demand for inflation linked bonds come from Pension Funds.

Specially for long term bonds.

But, the greater part of fixed rate bonds holded by pension funds have a relatively short maturity.

less than5 yearsR$ 8.1 bi84%

longer than5 yearsR$ 1.5 bi 16%

Fixed Rate ‐ NTN‐F

less than10 yearsR$ 53.7 bi

62%

longer than10 yearsR$ 32.7 bi

38%

Inflation Linked ‐ NTN‐B


38.586

27.458

56.801

‐

10.000

20.000

30.000

40.000

50.000

60.000

term < 5 y 5y < term < 10y term > 10 y

R$ million

Pension Funds' Inflation Linked Bonds

maturity

Pension Funds December,2007Pension Funds December,2007

6


Private Retirement Plan Private Retirement Plan

7

R$ billion


Foreign investors stance in domestic marketForeigner´s Investors: Distribution among Fixed Income instruments (R$ bn)

Foreigner´s Investors: Distribution among Fixed Income instruments (R$ bn)Foreigner´s Investors: Portfolio level (US$ bn)Foreigner´s Investors: Portfolio level (US$ bn)

Source: CVMSource: CVM

Foreigner's Investors: Domestic Debt ParticipationForeigner's Investors: Domestic Debt Participation

8Source: CVM and SELIC

R E

C E

N T

E V

E N

T S

42.6

149.1

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Jan-

06

Feb-

06

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

Aug

-06

Sep-

06

Oct

-06

Nov

-06

Dec

-06

Jan-

07

Feb-

07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep-

07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

US$

Bn

Fixed Income Equities

49.2

23.3

2.6

0

20

40

60

80

Jan-

06Fe

b-06

Mar

-06

Apr-

06M

ay-0

6Ju

n-06

Jul-0

6Aug

-06

Sep

-06

Oct

-06

Nov

-06

Dec

-06

Jan-

07Fe

b-07

Mar

-07

Apr-

07M

ay-0

7Ju

n-07

Jul-0

7Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

R$

Bn

Others

Mutual Funds (FIF)

National Treasury Bonds

4.96%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Jan-

06

Mar

-06

May

-06

Jul-0

6

Sep-

06

Nov

-06

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep-

07

Nov

-07

Jan-

08


less than5 yearsR$ 12.9 bi

56%

longer than5 yearsR$ 10.2 bi

44%

Fixed Rate ‐ NTN‐F

Foreign Investors December,2007 Foreign Investors December,2007

9

Foreign investors are more interested in long term inflation linked and long fixed rate bonds.

Foreign investors and Pension Funds are important groups of investors. They increasingly add liquidity to the market.

less than10 yearsR$ 7.9 bi 57%

longer than10 yearsR$ 5.9 bi 43%

Inflation Linked ‐ NTN‐B



10

Investor Base

Secondary Market

Market Perspective

Challenges Ahead


Secondary Market PSecondary Market P

11

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fixed Linked (NTN-F) 0% 0% 0% 2% 9% 8%

Inflation Linked 4% 3% 3% 14% 17% 14%

Fixed Linked (LTN) 19% 63% 58% 54% 48% 50%

Selic Linked 77% 34% 39% 29% 26% 28%

2003 2004 2005 2006 2007 2008

Increse in NTN-B and Fixed Rate Bonds

Decrease in Floating Rate Bonds


12

NTN-B Secondary MarketNTN-B Secondary Market

Source: National Treasury

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08

Mill

ions

Feb'06: tax exemption.


13

NTN-F Secondary MarketNTN-F Secondary Market


-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08

Mill

ions

Jan'07: first issuance of NTN-F 2017.

NTN-F 2017 traded volume as % of total traded volume:

=> 12% in 2007.=> 21% in 2008.


Atuação no Mercado Doméstico – Indicadores de liquidezBid-Ask Spreads in the Markets of NTN-F (fixed rate) and NTN-B (inflation linked)Bid-Ask Spreads in the Markets of NTN-F (fixed rate) and NTN-B (inflation linked)

14

• Fixed rate bonds bid-ask spreadswere significantly tightened.

•Inflation linked bonds bid-ask spreads are fairly priced, in spite of increased market volatility in 2008.

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

NTN-F jan/10 NTN-F jan/12 NTN-F jan/17

2006 2007 2008

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

0.12%

0.14%

NTN-B 2010 NTN-B 2015

2005 2006 2007 2008



15

Investor Base

Secondary Market

Investor Base and Liquidity

Challenges Ahead


16

Secondary Market and Investor BaseSecondary Market and Investor Base

Pension funds, foreign investors, mutual funds and banks constitute a diversified

group of investors.

Growing interest for inflation linked and long term fixed rate bonds.

Heterogeneous objectives and perspectives regarding federal bonds trading, what,

in general, provides balanced number of buyers and sellers.


17

Fixed Rate Bond Secondary MarketFixed Rate Bond Secondary Market


DI Index Funds Banks

Banks

Foreign Investors

Multi Strategy Funds


18

Inflation Linked Bond Secondary MarketInflation Linked Bond Secondary Market


Banks

Mutual Funds

Multi Strategy Funds

Foreign Investors

Banks Foreign Investors

Pension Funds


•In May 2006, following increased fears of US interest rate hikes, liquidity in the local secondary market decreased. Inflation linked notes were more negatively affected.

•Investors, specially foreign ones, tried to reduce their exposure by selling bonds. However there were not enough buyers of these assets.

•Pension funds, under investigation by authorities at that time, had limited access to the secondary market because of compliance issues. Even though bond ask prices were very attractive in the secondary market, these funds limited themselves to Treasury auctions.

•Noticing the lack of linkage between potential buyers and sellers, the National Treasury decided to conduct auctions in which it simultaneously issued and redeemed the same bonds (bid-ask auctions). As a result, after the third auction, the anxieties of sellers vanished.

19

Changes in the secondary market 2006/2007Changes in the secondary market 2006/2007


National Treasury considers the foreign investor an important partner to the improvement and lengthening of the public debt's composition;

The interventions' guideline was providing prices' parameters tothe market in a very unstable scenario;

Historically, when facing strong fluctuation on market indicators, the National Treasury acts as a market stabilizer agent;

The auctions' results, in terms of amounts bought and sold, confirm that the Treasury managed to bring the market back to calm levels.

National Treasury intervenes in unstable marketNational Treasury intervenes in unstable market

The Brazilian National Treasury carried through, on may 24, 25 and 26, simultaneous auctions to buy and sell NTN-Bs:

NET ISSUANCE

Buy and Sell Auction`s SpreadsBuy and Sell Auction`s Spreads

20

24 May, 2006 25 May, 2006 26 May, 2006Treasury´s Financial

Result R$ mn Treasury´s Financial

Result R$ mn Treasury´s Financial

Result R$ mn

2006 (144.67) (144.67) 2007 (23.03) (23.03) 2008 0.67 44.44 45.10 2009 48.33 (315.42) 42.54 (224.54) 2010 (303.65) 75.34 (656.78) (885.09) 2011 207.79 (26.44) 185.62 366.97 2015 (24.20) 191.32 (256.89) (89.77) 2024 (283.93) (227.43) 19.41 (491.95) 2035 (168.44) 22.00 116.82 (29.61) 2045 (542.93) (121.88) 489.97 (174.83)

Total (1,066.35) (425.54) (159.53) (1,651.42)

Total NTN-B AuctionsNTN-B Auctions

2005 2006 1

Issuance 23.47 31.47Redemption (2.08) (4.53)Early Redemption* (8.70) (8.97)Exchange 27.28 46.23

Buy and Sell Auction - (1.65)Issuance - 2.33Early Redemption - (3.98)

Net Issuance 39.96 62.561 Until May 2006* It includes the NTN-B received as payment on the Exchange auctions


In 2006 there was need for an intervention to fix the linkage between buyers and sellers of public bonds. In 2007 such an intervention was not needed, given the greater development of the secondary market.

Market was supported by the extension and diversification of the investor base. While foreign investors sold their assets in order to face losses in other countries, local pension funds and banks were able to provide fair bids. The banks that were short were specially willing to buy bonds and square their positions.

In August 2007, during the days of spiking volatility caused by the subprime crisis, the National Treasury did not intervene

NTN-B 2045 in 2006 and 2007NTN-B 2045 in 2006 and 2007

21

The National Treasury intervenes to stabilize marketsThe National Treasury intervenes to stabilize markets

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

%

2006 (NTNB 2045) 2007 (NTNB 2045)

Subprime Crises

National Treasury Spread Auctions:23, 24 and 25/may.


Developing Regulatory Structure in Line with Debt Management ObjectivesDeveloping Regulatory Structure in Line with Debt Management Objectives

22

Federal bonds held by pension funds and investment institutions can be classified as:

I – Trading

II – Hold to Maturity

Pension funds regulator created incentives to the electronic dealing, in accordance

with National Treasury efforts to promote it.

Such assets can be also used for lending. Though, detailed regualtion is still needed.

National Treasury is working with market participants towards that.


New rules for dealers:

Incentives for providing bid-ask spreads in specific intervals at market opening and close inelectronic trading systems.

Trading on Electronic PlataformsTrading on Electronic Plataforms


Electronic Trading of Public BondsElectronic Trading of Public Bonds

•Real time effective prices from electronic platform are available on Bloomberg…

•Soon on Reuters


•Concentration of maturities;

•Meetings with market participants such as pension funds and asset managers;

•Income tax exemption for foreign investors;

•Implementation of mechanisms that permit short selling of government bonds (under development; market currently makes use of Central Bank’s longer term repos)

•Incentives for transparency: bond price information systems and electronic trading systems.

25

Government measures to develop the secondary marketGovernment measures to develop the secondary market

Measures for the secondary market



26

Investor Base

Secondary Market

Market Perspective

Challenges Ahead


•Market structure still strongly driven by the floating rate “heritage” (immediate

liquidity perspective)

•Market potential

• Market size

• Heterogeneous perspectives of investors already existent

• Balanced composition of portfolios still to be reached

• Economic stability

27

Challenges AheadChallenges Ahead

Documents

5IF WJFXT FYQSFTTFE JO UIFTF QBQFST BOE QSFTFOUBUJPOT …€¦ · 5if wjfxt fyqsfttfe jo uiftf qbqfst boe qsftfoubujpot bsf uiptf pg uif bvuips t pomz boe uif qsftfodf pg uifn ps