How to buy Brazilian government bonds
In uncertain times, many investors look for ways of protecting themselves from domestic turbulence. International diversification through stocks and bonds is a proven method. While US Treasuries offer some of the lowest yield rates, bonds issued by governments of emerging markets may continue growing even when the largest economies are in distress.
By purchasing foreign bonds, you lend money to their issuers. This entitles you to regular interest payments, while the principal is paid back when the bond matures. The average Brazil bond yield is over 10% (10Y Government Bond), which is relatively high for this type of instrument.
Types of Brazilian securities
Bonds issued by the National Treasury of Brazil are classified as fixed-rate or floating-rate bonds. The latter may be linked to SELIC Over (the federal funds rate), inflation, or FX. Fixed-rate bonds are divided into LTN and NTN-F. LTN are bullet bonds, while maturities of NTN-F are based on quarterly cycles. Here is how to buy these securities online.
Buy bonds in 4 steps
Investors who do not reside in Brazil can trade government bonds without an income tax. The only exceptions are tax havens. The secondary market is very active, with multiple market makers and dealers.
1. Choose bonds
If you have no experience in the bond market, contact your investment advisor or stockbroker. They will provide a selection of bonds and their characteristics. To see which option is the best, consider a set of criteria, including rating, interest rate, maturity, and call features.
2. Do your own research
Your broker should provide a prospectus and more information on the bonds in question. Study this data carefully and find out more about the issuer. Your goal is to make sure they are credit-worthy and have met their financial obligations in the past.
3. Buy bonds
Make your final decision and buy the securities. You can pay by check or use cash in your brokerage account. Note that the currency exchange rate will apply, so check it in advance.
4. Get a certificate
Typically, brokerages automatically put bonds into “street name”. This means they are held in the name of the firm or another nominee, while you are listed as the real or “beneficial owner” in its records. You will also receive an account statement at least every quarter and every year.
If you do not like this arrangement, request a certificate for the securities. Note, however, that by keeping the assets in your account you protect them from theft and loss.
Know your risks
As a bond is, in layman’s terms, a form of lending, it is subject to both credit and market risks. On the one hand, the government may fail to pay interest and principal on time. To assess this risk, use indicators like the Standard and Poor’s rating, Moody’s rating, or Fitch rating. On the other hand, the price of bonds is inversely proportional to the interest rate, so it can change.