The yield on 10-year United States Treasury notes, the American government bonds known as Treasuries, climbed above 5% on Tuesday (September 15), the highest level since 2007. G1, citing the France Presse news agency, put the rate at 5.02%; InfoMoney reported 5.04%, up five basis points and the highest reading in 19 years. The 10-year note is the world's benchmark for borrowing costs.
The move tracks oil prices. A drone attack temporarily halted operations at the East-West pipeline in Saudi Arabia, a facility that lets the kingdom bypass the Strait of Hormuz and whose shutdown threatens up to 4% of global oil supply. According to Folha de S.Paulo, the Houthis, a Yemeni group allied with Iran, confirmed launching "dozens of ballistic missiles and drones" against Saudi Arabia and now control the Yemeni Red Sea coast and the Bab al-Mandeb strait, while Tehran keeps up its blockade of Hormuz, the route that carried about 20% of the world's traded oil before the conflict between the United States and Iran. On Tuesday, Brent crude rose 1.84% to $107.58 a barrel and WTI advanced 1.96% to $103.38, InfoMoney reported.
What it means for Brazil
For Brazil, the shock arrives through two channels: the exchange rate and interest rates. When Treasuries pay more, global investors move money into the United States, home to some of the safest assets in the world, and emerging markets lose appeal, as G1 explains. The dollar closed up 0.48% at R$ 5.148 on Monday (14) and traded near stability, at R$ 5.143, on Tuesday morning, according to Folha. A stronger dollar makes imports more expensive and pushes up inflation in internationally priced goods such as fuel, electronics and industrial inputs. With prices rising, Brazil's Central Bank tends to have less room to cut the Selic, the country's benchmark interest rate.
Markets were already showing the strain. The Ibovespa index fell 0.91% to 185,500 points on Monday, with oil producers' shares among the few gainers. On Tuesday, Wall Street futures pointed lower (Dow Jones -0.62%), European stocks slipped (STOXX 600 -0.77%) and Asia closed down, as Chinese retail sales grew 0.4% in August, below the 0.8% forecast, InfoMoney reported.
"Oil will continue to work as the main gauge of risk appetite. A new escalation can pressure the real, raise future interest rates and hurt domestic stocks, though it can support oil producers. In Brazil, the market should also adjust positions before Super Wednesday, with special attention to the interest rate curve, the exchange rate and the political crisis," Marcos Praca, head of analysis at Zero Markets Brasil, told Folha.
A week of decisions
Markets are pricing in a 0.25 percentage point increase at Wednesday's (16) decision of the Federal Open Market Committee (Fomc), the rate-setting body of the Federal Reserve, the US central bank, which would be the first hike in three years, G1 reported. InfoMoney said the bet reflects inflationary pressure from oil combined with the resilience of the American economy. Brazil's Monetary Policy Committee (Copom), which sets the Selic, announces its own decision the same day, a coincidence the market nicknamed "Super Wednesday".
In the real economy, the effects tend to come through credit. According to G1, higher rates usually make loans more expensive and slow household consumption, corporate investment and economic activity. The same mechanism applies to other emerging markets, which now compete for international capital against US bonds that pay more.