In times of crisis, the biggest hits to financial assets come at the beginning, the time when portfolio exposures are rapidly adjusted to the new negative information. Assets that appreciated pre-crisis, due to good yields or growth prospects, are often hit the worst. This has been seen in Emerging Market local bonds, which have delivered a 5% loss in US dollars since the Iran war began, almost double the declines of its dollar peers. From the beginning of 2026, they got a boost from a weaker US dollar, but the Iran war changed all that.
From such wreckage comes opportunities, and in emerging market bonds, Brazil may be that opportunity. Up to the war Brazil had seen its currency strengthen and bond yields remain high. But the war changed that; the Brazilian real went down, which reduced the yield pick-up of Brazil bonds versus US bonds.
Brazil had planned to conduct its regular auction of inflation-linked and fixed rates bonds but scrapped it. Instead of the planned auction going forth (putting supply on the market), Brazil conducted its first buyback of bonds since December 2024 (took bonds out of supply).
The war in Iran caused Brazil to call "audibles" regarding monetary policy and bond issuance. Impressive is the fact that despite all the inflation and economic growth uncertainty, Brazil's Central Bank lowered the benchmark rate .25% from 15% to 14.75% on March 18, 2026. Interest rate cuts in times of currency and political concerns are rare.
The .25% interest rate cut supports the idea that conditions in Brazil capital markets may not be that bad, and investors may have overreacted.
At present, Brazil offers an attractive local yield of around 13%; the interest rate pick-up between Etherfuse Brazilian Tesouro and Etherfuse US Treasuries is around 9%. The real is 5.22 to the US dollar, -1.95% since the Iran war broke out. The real would have to go to 5.69 to the US dollar to wipe out the yield pick-up of Brazilian bonds versus US bonds. Given the war seems to be de-escalating, it seems a pretty good bet that the Brazilian Real will not weaken to the level the wipes out the return over US bonds.
In conclusion, based on this spread, selling USDC or US bonds and buying Brazilian Tesouro bonds seems like a good trade. The Brazilian real could easily weaken against the US dollar, but more than 9%, to a level of 5.69 seems a bit much, given that most of the move happened in the early phase of the crisis and most of the weakness may be discounted in the price.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
