Broadening the investors base: practical examples from Brazil Otavio - - PowerPoint PPT Presentation

Broadening the investors base: practical examples from Brazil

Otavio Ladeira Medeiros Washington , D.C October 29-31 2012

Investor Base – Main ideas

Why is important to have a large and diversified Investor Base ?

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➢ A large and diversified investor base is important for ensuring strong and stable demand for

government debt securities. The investor base should ideally include both domestic and foreign investors and all types of institutions – ranging from commercial banks to insurance companies, pension funds, and mutual funds, as well as individual investors.

➢ Different time horizons, risk preferences and trading motives is vital for stimulating active trading

and high liquidity and enables the government to execute its funding strategy under a wide range

• f market conditions.

With that, take two interesting examples : Non Resident Investors and Pension Funds

Investors Base – Non-Resident Investors

In 2005-06, The National Treasury adopted a series of measures aimed at improving DPF management

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➢The Brazilian National Treasury took further steps to consolidate the process of market

• pening to NRI – Non-Resident Investors. On Feb-06 non-residents investors were exempted

from withholding tax on gains in operations with domestic federal bonds. That searched for :

➢Increasing the participation of foreign investor, which typically prefer long term bonds,

especially fixed rated and inflation linked ones;

➢Help to increase of participation of these bonds and the lengthening of the average

maturity of the public debt

Investors Base – Advances in Federal Public Debt Management

NRI: Domestic Debt share

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NTN-F 2017 - First nominal 10y bond issued in Jan 2007

13.34% 0% 2% 4% 6% 8% 10% 12% 14% 16% Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

Withholding Tax Exemption (Feb-06) IOF: 6% tax on foreign investment (Oct-10)

Investment Grade

Investors Base – Pension Funds

Active behavior with Pension Funds managers

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➢

In 2006 the scenario for a macroeconomic stabilization was better configured.

✓ This allowed a portfolio change from the Pension Funds side: leveraged with overnight

rate position – from the asset side, and exposed with inflation linked bonds – from the liabilities side

➢ The unbalance was sub-optimal: ✓ Treasury wanted to increase Inflation Linked bonds on the overall debt ✓ Pension Funds would loose money in locking in that position

Investors Base – Pension Funds

Active behavior with Pension Funds managers

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» Then, the Treasury approached Pension Fund managers on 2005-2006 » Show them the importance of rebalancing their portfolios sooner rather than later

12.26 12.26 12.22 12.2 12.18 12.06 11.5 12.25 11.4 11.5 11.6 11.7 11.8 11.9 12 12.1 12.2 12.3 12.4 1 month 2 months 3 months 4 months 5 months 6 months NTNB May-2007 Floating Rate Bonds HTM Inflation-Linked bonds HTM

Example: Hypothetical Yield for an Inflation-Linked Investment vs Overnight Rate -(% p.y.)

Investors Base – Improvements on Governments´ Funds

“Government´s” portfolio => efforts to align with the Federal Public Debt guidelines

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Inflation linked bonds 18% Floating 66% Fixed rate 16%

Jan -12

Inflation linked bonds 33.8% Floating 25.13% Fixed rate 41.05%

March -12

Inflation linked bonds 57.4% Floating 0.3% Fixed rate 42.3%

June -12

After “Extramercado” After “Extramercado” + FGTS

Investors Base – Retail Sales Program

Tesouro Direto

8 ➢

The Tesouro Direto, a retail sales program to sell regularly bonds to Brazilians citizens through internet, was launched in 2002 with the following objectives: (i) to offer another savings product alternative; (ii) to increase the investors base; and (iii) for didactic purposes (transparency).

✓

uses roughly the same on-the-run instruments for debt roll-over. One exception tailored for retailers: Zero-coupon inflation-linked bonds, the most sold

✓

individuals choose one agent (bank or broker) to link them into the system and then are enabled to buy securities regular government securities through the internet

✓

Costs vary a lot – there is a list on the website

✓

There is weekly liquidity: bonds are bought back by the Treasury every Wednesday

✓

Minimum amount per operation: 1/10 of a bond unit => around US$ 30.0

✓

Customized portfolio: 3 kinds of bonds (fixed rate, inflation linked and floating rate) with maturities ranging from 1 to 40 years.

Investors Base – Retail Sales Program

Tesouro Direto: Investors evolution

9 ➢ There are 500 thousand Brazilian investing directly in stock exchange … a lot of room for increasing the number

• f Treasury Direct participants.
• 50,000

100,000 150,000 200,000 250,000 300,000 350,000 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12

317,352

Investors Base – Retail Sales Program

Tesouro Direto Outstanding Stock

10 ➢ Despite it reached R$ 9 billion (roughly USD 4,5 billion), the Treasury Direct Program represents less than 0,5%

• f the total Federal Public Debt held by the public.
• 1.00

2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 8.99

R$ Billion

Government 7% Financial Institutions 33% Mutual Funds 23% Pension Funds 15% Non-residents 1% Insurance 2% Others 8% External debt 11%

Federal Public Debt Holders: Broadening the Investors base

Public Debt Holders - Snapshot ( Jan 2007)

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Public Debt Holders - Snapshot ( Aug 2012)

… result of a long term strategy adopted by the National Treasury aimed at diversifying the investor base.

Government 8% Financial Institutions 27% Mutual Funds 24% Pension Funds 16% Non-residents 13% Insurance 3% Others 4% External debt 5%

Holders’ Domestic Public Debt Portfolio

By security type (August 2012)

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By maturity (August 2012)

Source: National Treasury

» As regards the debt by type, 50% of bank holdings are fixed rate bonds, while 54% of Mutual Fund’s portfolio is in floating rate bonds. Inflation-linked bonds are 73% of Pension Fund holdings. » Regarding maturities, Pension Fund portfolio’s have longest duration.

Source: National Treasury

Public Debt Management

53% 21% 18% 44% 78% 24% 26% 51% 9% 0% 3% 23% 20% 29% 74% 56% 19% 53%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Financial Institutions Mutual Funds Pension Government Non-residents Insurance Fixed Rate Floating Rate Inflation Linked Others 25% 23% 10% 28% 30% 12% 39% 41% 22% 29% 21% 33% 19% 15% 16% 25% 20% 11% 17% 21% 52% 18% 29% 44% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Financial Institutions Mutual Funds Pension Non-residents Government Insurance Up to 1 Year From 1 to 3 Years From 3 to 5 Years After 5 Years

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For additional information access the National Treasury website: www.tesouro.fazenda.gov.br Or contact Institutional Relations area: brazildebt@fazenda.gov.br

The information on this presentation is issued by the Brazilian Debt Management Office (DMO) for informational purposes. It does not contain and is not an invitation or offer to buy or sell securities. Translation of the original text of this document is provided only for the convenience of the reader. While reasonable care has been taken to ensure the authenticity of the translation, its accuracy cannot be guaranteed. Reliance upon this translation shall be at the reader's own risk. Under no circumstances, shall the Brazilian National Treasury, its officers, employees or agents be liable to the reader or anyone else for any inaccuracy, error, inconsistency,

• mission, deletion, defect or alteration of the content of the translation from the original Portuguese text, regardless of cause, or for any damages

resulting therefore. The

• riginal

Portuguese text

• f

this document is the

• nly
• fficial

version, which can be found in http://www.stn.fazenda.gov.br/index.asp. In the event of any discrepancy or contradiction between the Portuguese and translated version, the Portuguese version shall prevail.