With long-term real rates surpassing 7% for the first time since 2016 and yields on NTN-Bs maturing in 2027 climbing above 8%, comparisons to the crisis era are resurfacing, despite differences in current economic conditions.

The National Treasury has responded by suspending a scheduled auction of fixed-rate bonds due in 2025 and announcing repurchase operations for the week without specifying transaction details.

“We are witnessing increased risk directly linked to the growth of public debt. It’s not just about government spending exceeding revenue but also about a rising deficit that further inflates debt levels, which are already high relative to GDP,” said Ronaldo Patah, strategist at UBS Wealth Management.

The trajectory of rising real interest rates has persisted throughout 2024, driven by heightened fiscal risks and elevated neutral interest rates globally in the post-pandemic era.

The trend has accelerated recently, fueled by market disappointment over the government’s spending containment package. Since late November, the yield on NTN-Bs maturing in August 2050 has jumped from 6.77% to 7.2%.

“What we’re doing now is comparing today’s risk premium to what we saw in 2015 under the Dilma administration, when debt levels surged, and deficits were extraordinarily high,” Mr. Patah explained. “Currently, Brazil’s nominal deficit is 9.5%, compared to 10% back then. This suggests that the current premium is not exaggerated but reflective of heightened risks.”

Mr. Patah added that real interest rates in the U.S. were 150 basis points lower in 2015, which reduces external pressure on Brazilian rates today. However, he warned that if fiscal conditions continue to worsen, the market could price in an even greater risk premium.

Michael Kusunoki, head of fixed income and multi-asset strategies at BNP Paribas Asset Management, considers the comparison with the mid-decade economic crisis “a bit exaggerated,” as at that time not only were U.S. interest rates much lower, but domestic inflation was significantly higher. However, he acknowledged that market sentiment is shifting toward fears of fiscal dominance—where monetary policy loses its ability to anchor expectations amid fiscal imbalance.

“We’re nearing a scenario of fiscal dominance,” Mr. Kusunoki said. “This interpretation is supported by recent developments, especially following the Central Bank’s Monetary Policy Committee (COPOM) meeting.”

Last week, the COPOM raised the Selic policy rate by 100 basis points to 12.25%, signaling two additional hikes of the same magnitude in early 2025. Despite these measures, implied inflation has risen, and the future interest rate curve has worsened.

“From a monetary policy standpoint, there isn’t much else the Central Bank can do to improve the situation,” Mr. Kusunoki said.

Julio Fernandes, partner and macro manager at XP Asset Management, echoed this sentiment, emphasizing that only a shift in fiscal policy could stabilize real interest rates. “The key to reversing this trajectory is stronger measures to address the rising debt-to-GDP ratio,” he said. While the government’s spending review package could offer temporary support, more robust action is needed to project debt stabilization over the long term.

“The missing link for market normalization is credible action to stabilize federal debt levels,” Mr. Fernandes added.

Mr. Kusunoki of BNP Asset expressed skepticism about the effectiveness of the current fiscal measures being debated in Congress. “Will these measures be sufficient? I can’t say for sure,” he noted.

The escalating real rates have raised concerns about the sustainability of rolling over public debt. “A growing deficit and rising debt at very high interest rates could jeopardize repayment capacity,” Mr. Patah warned.

In response to mounting stress, the Treasury announced last week that it would auction bonds with a minimum lot size of 50,000 across all maturities. However, the lack of impact on rates led to the cancellation of a pre-fixed bond auction scheduled for Thursday, with repurchase operations planned instead.

In Mr. Kusunoki’s view, the Treasury should prioritize addressing risks to refinancing public debt rather than focusing on the current level of interest rates. “If liquidity cushions become too tight, it could lead to rollover problems, which is the worst-case scenario,” he warned.

Despite the current turbulence, Mr. Kusunoki holds positions in NTN-Bs maturing between 2027 and 2028, citing them as viable assets for inflation protection. “Given the overall context, these are still investable options,” he said.

Meanwhile, Mr. Patah maintains allocations in long-term real interest rates but recommends these investments only for those with extended horizons and no immediate liquidity needs. “The next six months will remain challenging while the Central Bank continues raising rates,” he concluded.