Broadening the investors base: practical examples from Brazil

Broadening the investors base: practical examples from Brazil

Otavio Ladeira Medeiros

Washington , D.C

October 29-31 2012

2

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

3

Investors Base – Non-Resident InvestorsIn 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

4

Investors Base – Advances in Federal Public Debt Management

NRI: Domestic Debt share

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

13.34%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jan-0

5Ap

r-05

Jul-0

5O

ct-05

Jan-0

6Ap

r-06

Jul-0

6O

ct-06

Jan-0

7Ap

r-07

Jul-0

7O

ct-07

Jan-0

8Ap

r-08

Jul-0

8O

ct-08

Jan-0

9Ap

r-09

Jul-0

9O

ct-09

Jan-1

0Ap

r-10

Jul-1

0O

ct-10

Jan-1

1Ap

r-11

Jul-1

1O

ct-11

Jan-1

2Ap

r-12

Jul-1

2

Withholding Tax Exemption (Feb-06)

IOF: 6% tax on foreigninvestment (Oct-10)

Investment Grade

5

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

6

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

12.26 12.26 12.22 12.2 12.18 12.06

11.5

12.25

11.411.511.611.711.811.9

1212.112.212.312.4

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.)

7

Investors Base – Improvements on Governments´ Funds

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

In-fla-tion linke

d bond

s18%

Floating66%

Fixed rate16%

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

8

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.

9

Investors Base – Retail Sales Program

Tesouro Direto: Investors evolution

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

Treasury Direct participants.

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000 De

c-07

Mar-

08

Jun-0

8

Sep-0

8

Dec-0

8

Mar-

09

Jun-0

9

Sep-0

9

Dec-0

9

Mar-

10

Jun-1

0

Sep-1

0

Dec-1

0

Mar-

11

Jun-1

1

Sep-1

1

Dec-1

1

Mar-

12

Jun-1

2

Sep-1

2

317,352

10

Investors Base – Retail Sales Program

Tesouro Direto Outstanding Stock

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.

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Jan-0

8

May-

08

Sep-0

8

Jan-0

9

May-

09

Sep-0

9

Jan-1

0

May-

10

Sep-1

0

Jan-1

1

May-

11

Sep-1

1

Jan-1

2

May-

12

Sep-1

2

8.99

R$Billi

on

11

Government7%

Financial Institutions

33%

Mutual Funds23%

Pension Funds15%

Non-residents1%

Insurance2%

Others8%

External debt11%

Federal Public Debt Holders: Broadening the Investors base

Public Debt Holders - Snapshot ( Jan 2007) Public Debt Holders - Snapshot ( Aug 2012)

… result of a long term strategy adopted by the National Treasury aimed at

diversifying the investor base.

Government8%

Financial Institutions

27%

Mutual Funds24%

Pension Funds16%

Non-residents13%

Insurance3%

Others4%

External debt5%

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

13

For additional information access the National Treasury website:

www.tesouro.fazenda.gov.br

Or contact Institutional Relations area:

[email protected]

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.