Authors
Brazilian corporate bonds are not benefiting from the strong year in emerging markets. The recent weakness reflects an event that upset the balance in a market where macroeconomic conditions had already been weighing on corporate bonds for some time. The volatility during this period revealed several interesting observations.
A Year of Divergence
Emerging markets (EM) are experiencing one of their strongest years in a long time. The Bloomberg EM Aggregate Index has posted a gain of +10.46%¹ so far this year, supported by interest rate cut cycles in several countries and robust fundamentals. Brazil, however, is a notable exception: with a year-to-date return of 5.91%², the country ranks among the weakest EM markets. For investors who paid attention to the fundamentals, this weakness came as no surprise.
¹Bloomberg, I00014US Index, as of November 14, 2025
²Bloomberg, I00515US Index, as of November 14, 2025
Structural Stress Factors
Since August 2022, real interest rates in Brazil (the policy rate minus year-over-year inflation) have been ranging between 6% and 10%, an unusually high level for an economy with real growth of only 2% to 4%. High interest rates not only directly increase the refinancing costs for Brazilian issuers but also depress asset and equity valuations, limiting opportunities for capital raises or asset sales. This challenging environment increased the risk of a significant credit event, which occurred in late September.
Brazilian Corporate Bonds Under Pressure
Source: Bloomberg, Bloomberg Emerging Markets Brazil Total Return Index (I00515US Index) and Bloomberg Emerging Markets Ba Total Return Index (I05040 Index); Period: December 31, 2024, through November 14, 2025.
Event-Driven Sell-Off
Braskem, one of the country’s largest corporate issuers, retained financial and legal advisors in late September to evaluate options for optimizing its capital structure. Historically, such a move has often preceded a default and, accordingly, triggered a broad sell-off across the entire market. In the two weeks between September 24 and October 10, spreads on the majority of Brazilian corporate bonds widened by 20–40 basis points, and by up to 400 basis points for issuers with weaker fundamentals. Notably, 96% of all issuers saw their spreads widen.
The broad-based widening points to signs of spillover effects, but the decile analysis quantifies just how uneven the adjustment actually was: The bottom decile widened by 216 bps, while the top decile moved by only 4 bps. This distribution analysis complements the movement at the index level and underscores the high cross-sectional dispersion during the widening phase. During the recovery period from October 10 to November 14, spreads narrowed across all deciles in a nearly parallel manner, with the recovery clustering within a significantly narrower range—a pattern that clearly differs from the dispersion observed during the widening phase.
Differentiated Expansion, Parallel Recovery
Source: Bloomberg, Bloomberg Emerging Markets Brazil Total Return Index (I00515US Index); our own calculations (excluding SAMMIN, OIBRBZ, and BRASKM); period: September 24, 2025, through November 14, 2025.
Understand Market Repricing Before You Trade
Periods of volatility often create opportunities for managers who take a fundamental approach. Whether the market moves with diverging spreads or more parallel narrowing—these phases tend to create mispricings that can result from shifts in liquidity, portfolio rebalancing, or short-term opportunistic flows. Before considering whether current spreads represent an entry point, it is essential to understand whether the company’s fundamentals or the original investment thesis have changed in response to the triggering event.
“Recent developments appear to have served as a catalyst for a reassessment in a market—
—that was already under considerable macroeconomic pressure.”
– Roman Nasonov, CFA
Source: Bloomberg (Bloomberg Emerging Markets Brazil Total Return Unhedged USD, I00515US Index; Bloomberg EM USD Aggregate Total Return Index Value Unhedged, I00014US Index)
Risks
Price losses due to increases in yields and/or higher risk premiums are possible. A total loss cannot be ruled out either.
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