May 27 / Guilhermo Marques

US government bonds, changes to the IOF and the impact on the exchange rate.

  Back to main blog page

US government bonds, changes to the IOF and the impact on the exchange rate.

Last week, the BRL appreciated slightly against the USD, closing at R$5,663. Although in the first few days of the week the trend was stable, it devalued a little between Monday (19) and Tuesday (20), from R$5.6512 to 5.7145, Friday's trading session (23) showed greater volatility. In May, the real has appreciated by 0.5%, while in 2025 by 8.72%.

BRL/USD Weekly Performance

Source: Reuters, Hedgepoint

Brazilian Domestic Market

The main domestic factor this past week was the increase in the IOF (tax on financial transactions) rate announced by Finance Minister Fernando Haddad on Tuesday afternoon (22), with an effective start date of next Tuesday (23). The measure, together with the containment of BRL 31.3 billion in the Budget, is aimed at reducing the public deficit to meet the "zero deficit" target by 2025. With the increase in the IOF, the government is seeking to raise more taxes, thus increasing its fundraising.

IOF  Announced Changes

Source: InfoMoney and others, elaborated by Hedgepoint

The IOF (Tax on Financial Transactions) is an instrument used by the government not only for tax collection purposes, but also as a tool for regulating the economy, influencing the flow of capital and exchange rate behavior.

An increase in this tax can have a significant impact on the Brazilian currency, especially when it is levied on operations related to international investments, foreign loans, imports, exports, or financial remittances. The effects vary according to the type of operation taxed, the macroeconomic context in force and, above all, the expectations of market agents.

Among the possible effects on the exchange rate could be a reduction in foreign capital inflows, a slowdown in international remittances, a change in market expectations, and indirect effects on inflation and interest rates.

It will be important to keep a close eye on how the market reacts over the next few days. The increase in tax rates for remittances abroad, foreign currency purchases and the use of international cards tends to increase the cost of these transactions for individuals and companies. This move could discourage the entry of foreign capital into the country and, on the other hand, encourage the anticipation of outflows of funds, especially in a scenario of fiscal uncertainty and high sensitivity to financial flows. If this dynamic intensifies, there is potential for additional pressure on the exchange rate, with a risk of devaluation of the real against the dollar.

Global Factors and Commodities

On the global scene, market movements were due to Moody's downgrading the US sovereign credit rating to AA+ with a stable outlook, from AAA with a negative bias. It's important to note that this was the only rating from the main rating agencies (Fitch, Moody's, and S&P) remaining at AAA level, where S&P had already made such a revision to AA+ stable in August 2011 and Fitch, following the same direction in 2023.

The main impact that this action has on the market is making explicit the unsustainable long-term trajectory of the US debt and the subsequent unsuccessful actions by the government to address the deficit and the high cost of the debt.

Evolution of American Bonds: 10Yr and 30Yr

Source: Reuters, Hedgepoint

US government bonds with high long-term yields

Considering recent events, we need to be clear about which variables we should monitor in order to better understand the market and its trends. Given the change in the US rating, the Treasuries are the main indicators to monitor.

Treasuries are debt securities issued by the US government to finance its operations:

  • T-bills (short term, up to 1 year)
  • T-notes (medium term, 2 to 10 years)
  • T-bonds (long term, 20 to 30 years)
  • TIPS (inflation protected)


When investors demand a higher yield to buy long-term bonds, such as 30-year bonds:

  • This indicates a loss of confidence in the fiscal or monetary health of the issuing country.
  • It may reflect expectations of higher inflation in the future or a higher risk premium.
  • Bond prices fall as yields rise (the relationship is inverse).


The fact that yields on 30-year bonds are at 5.1% sets off a warning signal in the market. As they are close to the highest levels in recent years, they reflect investors' growing concern about the sustainability of US debt, which leads them to demand a higher premium to keep these securities in their portfolios. Last Thursday (22), President Donald Trump won a victory in the US Congress by passing the bill dubbed the "One Big Beautiful Bill" (OBBB). In a narrow margin (215 votes to 214), the measure offers tax cuts for individuals, raising the deduction ceiling from $10,000 to $40,000, measures on energy, the environment, immigration and security, and most importantly, raising the US debt ceiling by $4 trillion for the next few years. All these factors together raise concerns about the total US debt and its solidity in the future.


Thus, the growing concern about the US economy, coupled with decisions such as raising the country's debt ceiling, can be interpreted as a restriction on the appreciation of its currency. This situation makes it difficult to understand a clear trend for the Brazilian real against the dollar, since both governments have taken decisions that could harm the strength of their currencies.


In a nutshell

The combination of the downgrade of the US sovereign rating, the rise in the yields of long-term Treasuries and the approval of new expansionary fiscal measures by the US Congress has significantly increased the level of uncertainty in global markets. This scenario puts pressure on the US yield curve and increases risk aversion, with direct effects on capital flows to emerging economies such as Brazil.

As for Brazil, the increase in the IOF from May 23, 2025, although intended to reinforce the Brazilian government's commitment to fiscal balance, could have an adverse effect in the short term by reducing the country's attractiveness to foreign investors and making international operations more expensive for companies and individuals. The market's response to these measures will be crucial to understanding the exchange rate's next moves.

Therefore, although the real has appreciated slightly in recent weeks, the balance remains fragile. The behavior of the exchange rate over the next few days will depend on the market's interpretation of the sustainability of the fiscal measures adopted in both the United States and Brazil, as well as sensitivity to capital flows in a more cautious global environment. Exchange rate volatility is likely to remain high, requiring extra attention from economic agents exposed to the risk of dollar fluctuations.


Written by Guilhermo Marques
guilhermo.marques@hedgepointglobal.com
Reviewed by Lívea Coda
livea.coda@hedgepointglobal.com
www.hedgepointglobal.com

Disclaimer

This document has been prepared by Hedgepoint Schweiz AG and its affiliates (“Hedgepoint”) solely for informational and instructional purposes, without intending to create obligations or commitments to third parties. It is not intended to promote or solicit an offer for the sale or purchase of any securities, commodities interests, or investment products. Hedgepoint and its associates expressly disclaim any liability for the use of the information contained herein that directly or indirectly results in any kind of damages. Information is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. The trading of commodities interests, such as futures, options, and swaps, involves substantial risk of loss and may not be suitable for all investors. You should carefully consider wither such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results. Customers should rely on their own independent judgment and/or consult advisors before entering into any transactions. Hedgepoint does not provide legal, tax or accounting advice and you are responsible for seeking any such advice separately. Hedgepoint Schweiz AG is organized, incorporated, and existing under the laws of Switzerland, is filiated to ARIF, the Association Romande des Intermédiaires Financiers, which is a FINMA-authorized Self-Regulatory Organization. Hedgepoint Commodities LLC is organized, incorporated, and existing under the laws of the USA, and is authorized and regulated by the Commodity Futures Trading Commission (CFTC) and a member of the National Futures Association (NFA) to act as an Introducing Broker and Commodity Trading Advisor. HedgePoint Global Markets Limited is Regulated by the Dubai Financial Services Authority. The content is directed at Professional Clients and not Retail Clients. Hedgepoint Global Markets PTE. Ltd is organized, incorporated, and existing under the laws of Singapore, exempted from obtaining a financial services license as per the Second Schedule of the Securities and Futures (Licensing and Conduct of Business) Act, by the Monetary Authority of Singapore (MAS). Hedgepoint Global Markets DTVM Ltda. is authorized and regulated in Brazil by the Central Bank of Brazil (BCB) and the Brazilian Securities Commission (CVM). Hedgepoint Serviços Ltda. is organized, incorporated, and existing under the laws of Brazil. Hedgepoint Global Markets S.A. is organized, incorporated, and existing under the laws of Uruguay. In case of questions not resolved by the first instance of customer contact (client.services@Hedgepointglobal.com), please contact internal ombudsman channel (ombudsman@hedgepointglobal.com – global or ouvidoria@hedgepointglobal.com – Brazil only) or call 0800-8788408 (Brazil only). Integrity, ethics, and transparency are values that guide our culture. To further strengthen our practices, Hedgepoint has a whistleblower channel for employees and third-parties by e-mail ethicline@hedgepointglobal.com or forms Ethic Line – Hedgepoint Global Markets. “HedgePoint” and the “HedgePoint” logo are marks for the exclusive use of HedgePoint and/or its affiliates. Use or reproduction is prohibited, unless expressly authorized by HedgePoint. Furthermore, the use of any other marks in this document has been authorized for identification purposes only. It does not, therefore, imply any rights of HedgePoint in these marks or imply endorsement, association or seal by the owners of these marks with HedgePoint or its affiliates.

To access this report, you need to be a subscriber.