Even Brazilian Bonds... Yields Plunge 33%

High Interest Rates and Tax Benefits Drive Popularity
Emerging Market Bond Yields Decline
Brazil Bond Losses Exceed 30%
Impact of 36.8% Sharp Drop in Real Value
High Volatility and COVID-19 Spread Caution, Investment Should Be Avoided for Now

[Asia Economy Reporter Park Jihwan] Investors in emerging market bonds such as Brazil, who could enjoy not only high interest rates but also tax benefits, are facing increasing concerns. This is because bond yields, which posted excellent returns of 20-30% last year, have taken a direct hit due to the recent spread of the novel coronavirus (COVID-19) and other factors.

According to NH Investment & Securities on the 29th, as of the 27th, the yield on 10-year Brazilian government bonds this year showed -32.55%. This is the exact opposite situation compared to last year's 24.5% return. In particular, the decline has steepened as time passed this year. The yield, which was -4.8% cumulatively in January since the beginning of the year, fell to -8.3% in February. By the end of last month, it dropped to -25.7%, and recently it has plunged further, showing losses exceeding 30%.

The situation of Russian government bonds, also considered a representative emerging market bond investment option along with Brazil, is somewhat better. The yield on 10-year Russian government bonds plunged to -25% at one point this year but has recently reduced losses to -7.7%.

When investing directly in overseas bonds, investors can expect interest income, capital gains from bond price appreciation during the investment period, and foreign exchange gains due to currency fluctuations. Generally, overseas government bonds are exempt from taxes on capital gains and foreign exchange gains, with only a 15.4% tax imposed on interest income. In particular, Brazilian government bonds attract the most attention from investors because they offer high interest rates and provide tax-exempt benefits on interest income.

A representative from the Korea Financial Investment Association explained, "Under the tax treaty between Korea and Brazil, interest income, foreign exchange gains, and bond valuation gains from Brazilian government bonds are all tax-exempt," adding, "The annual interest rate on Brazilian government bonds is also quite high, around 7%."

The most important factor to consider when investing in overseas bonds is the exchange rate. The recent poor performance of emerging market bond yields is largely due to the sharp depreciation of their currencies. In fact, the Brazilian real exchange rate soared from 4.02 reals per dollar at the end of last year to 5.50 reals per dollar as of this date. This means the real has depreciated by 36.8% in just four months. As the real's value falls, the won-denominated returns decrease accordingly.

Additionally, the decline in bond prices is also worrisome. As of the previous day, the yield on 10-year Brazilian government bonds was 8.031%. After the spread of COVID-19 intensified in Latin America on the 23rd of last month, the yield surged to 9.84% (which corresponds to a sharp drop in bond prices) but has since stabilized somewhat. However, the recent rise in yields back above 8%, after falling to the 6% range within the past week, is a concerning development.

Most experts advise refraining from investing in emerging market bonds aiming for bargain purchases based on the current situation. Although the currencies of emerging markets have depreciated significantly, the volatility remains high, and the further spread of the COVID-19 situation needs to be monitored.

Kim Seongsu, a researcher at NH Investment & Securities, explained, "Russian bonds may be considered more attractive compared to other emerging markets, but considering the economic situation and the country's fundamentals, the worst phase may have passed, but it is not yet the stage to recommend buying."

He added, "The reason Brazilian bonds performed strongly last year was due to expectations that pension reforms would improve fiscal soundness and secure growth momentum. Recently, however, due to COVID-19, much more money has been spent on economic stimulus than on reducing fiscal deficits, and especially with the real's value at an all-time low, there are concerns about foreign exchange losses. Domestic investors need to exercise caution when investing."

This content was produced with the assistance of AI translation services.