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 ? ➢ 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 of market conditions. With that, take two interesting examples : Non Resident Investors and Pension Funds 2
Investors Base – Non-Resident Investors In 2005-06, The National Treasury adopted a series of measures aimed at improving DPF management ➢ The Brazilian National Treasury took further steps to consolidate the process of market opening 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 3
Investors Base – Advances in Federal Public Debt Management NRI: Domestic Debt share 16% Investment Grade 14% 13.34% 12% 10% 8% IOF: 6% tax on foreign investment (Oct-10) 6% 4% Withholding Tax Exemption (Feb-06) 2% 0% 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 NTN-F 2017 - First nominal 10y bond issued in Jan 2007 4
Investors Base – Pension Funds Active behavior with Pension Funds managers 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 5
Investors Base – Pension Funds Active behavior with Pension Funds managers » Then, the Treasury approached Pension Fund managers on 2005-2006 » Show them the importance of rebalancing their portfolios sooner rather than later Example: Hypothetical Yield for an Inflation-Linked Investment vs Overnight Rate -(% p.y.) NTNB May-2007 Floating Rate Bonds HTM Inflation-Linked bonds HTM 12.4 12.3 12.25 12.2 12.26 12.26 12.22 12.1 12.2 12.18 12.06 12 11.9 11.8 11.7 11.6 11.5 11.5 11.4 1 month 2 months 3 months 4 months 5 months 6 months 6
Investors Base – Improvements on Governments´ Funds “Government ´ s” portfolio => efforts to align with the Federal Public Debt guidelines Jan -12 March -12 June -12 Inflation Fixed rate linked 16% bonds Inflation 18% linked Fixed Fixed rate bonds rate Inflation 41.05% 33.8% 42.3% linked bonds 57.4% Floating Floating Floating 0.3% 25.13% 66% After “Extramercado” + FGTS After “Extramercado” 7
Investors Base – Retail Sales Program Tesouro Direto ➢ 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. 8
Investors Base – Retail Sales Program Tesouro Direto: Investors evolution 350,000 317,352 300,000 250,000 200,000 150,000 100,000 50,000 - Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Jun-09 Dec-09 Mar-10 Jun-10 Dec-10 Mar-11 Jun-11 Dec-11 Mar-12 Jun-12 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 ➢ There are 500 thousand Brazilian investing directly in stock exchange … a lot of room for increasing the number of Treasury Direct participants. 9
Investors Base – Retail Sales Program Tesouro Direto Outstanding Stock 10.00 8.99 9.00 8.00 7.00 6.00 R$ Billion 5.00 4.00 3.00 2.00 1.00 - 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 ➢ Despite it reached R$ 9 billion (roughly USD 4,5 billion), the Treasury Direct Program represents less than 0,5% of the total Federal Public Debt held by the public. 10
Federal Public Debt Holders: Broadening the Investors base Public Debt Holders - Snapshot ( Jan 2007) Public Debt Holders - Snapshot ( Aug 2012) Financial Institutions Mutual Funds Financial 33% 24% Institutions 27% Government Mutual Funds 7% 23% Pension Funds External debt Government 16% 11% 8% Others Pension Funds External debt Non-residents 8% 15% 5% 13% Insurance Non-residents Others Insurance 1% 2% 4% 3% … result of a long term strategy adopted by the National Treasury aimed at diversifying the investor base. 11
Public Debt Management Holders’ Domestic Public Debt Portfolio By security type (August 2012) » As regards the debt by type, 50% of bank holdings are fixed rate bonds, while 54% of Mutual Fund’s 100% 19% 90% 20% portfolio is in floating rate bonds. Inflation-linked 29% 80% 3% 53% 56% bonds are 73% of Pension Fund holdings. 70% 26% 74% 60% 50% 51% 0% 40% 78% By maturity (August 2012) 23% 30% 53% 9% 44% 20% 100% 24% 21% 10% 18% 17% 18% 90% 21% 0% 29% 80% Financial Mutual Funds Pension Government Non-residents Insurance 44% 19% 52% Institutions 15% 70% 25% Fixed Rate Floating Rate Inflation Linked Others 20% 60% Source: National Treasury 50% 11% 39% 41% 29% 21% 40% 16% » Regarding maturities, Pension Fund portfolio’s have 30% 33% 22% 20% longest duration. 30% 28% 25% 23% 10% 12% 10% 0% Financial Mutual Funds Pension Non-residents Government Insurance Institutions Up to 1 Year From 1 to 3 Years From 3 to 5 Years After 5 Years 12 Source: National Treasury
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, omission, 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 original Portuguese text of this document is the only official 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. 13
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