Key Takeaways
- • Brazilian real carry trade is experiencing a significant pullback as hedge funds and asset managers reduce exposure ahead of the October 2026 presidential election, despite the currency gaining approximately 6% against the US dollar year-to-date.
- • Portfolio managers at major institutions—including VanEck's David Austerweil and Eric Fine, Vontobel's Thierry Larose, and Aberdeen's Kieran Curtis—have actively trimmed Brazilian real and local fixed-income positions in response to elevated political uncertainty.
- • High domestic interest rates that fueled the carry trade's appeal remain attractive on a fundamental basis, but election-driven volatility concerns are outweighing yield considerations for risk-conscious institutional investors.
- • President Luiz Inacio Lula da Silva holds a commanding polling lead with approximately two-thirds probability of re-election according to betting markets, yet concerns about fiscal sustainability and debt stabilization persist regardless of outcome.
- • Historical precedent from late 2024—when loss of investor confidence triggered a real currency crash to record lows and broad-based selloff across equities and fixed income—has reinforced portfolio managers' caution toward Brazilian assets during election periods.
Summary
Brazil's popular real carry trade is facing renewed headwinds as institutional investors reduce exposure ahead of the country's October presidential election. Despite the Brazilian real appreciating roughly 6% against the US dollar year-to-date, making it one of the stronger-performing emerging-market currencies, heightened political uncertainty is prompting major asset managers to trim positions in both the currency and local fixed-income securities.
Portfolio managers across several institutions have taken defensive action. VanEck's David Austerweil and Eric Fine have reduced positions in Brazilian local fixed income, while Vontobel's Thierry Larose has moved to an underweight position in the real itself. Aberdeen's Kieran Curtis has similarly been cutting currency exposure. For these managers, the decision reflects not necessarily a bearish call on the election outcome, but rather a prudent reduction in vulnerability to the volatility expected during the election period.
The carry trade has thrived on Brazil's persistently high domestic interest rates, which allow foreign investors to earn substantial yields by funding positions in lower-yielding currencies. However, the political dimension introduces a secondary risk layer. Although incumbent President Luiz Inacio Lula da Silva currently leads opinion polls and is viewed as the favourite, with betting markets assigning him roughly a two-thirds probability of securing another term, the contest carries material uncertainty. Some surveys indicate the race could be considerably closer than consensus polling suggests.
The deeper concern for investors centers on Brazil's fiscal trajectory. A Lula re-election has revived questions about whether the government will implement—or be able to implement—measures capable of stabilizing public finances. This concern is not theoretical: in late 2024, a sharp loss of investor confidence sent the real to a record low and triggered a broad selloff across Brazilian equities, local-currency debt, and hard-currency obligations. Recent polling movements have already produced measurable market reactions, suggesting that even incremental shifts in political probability can move asset prices materially.
The current pullback reflects a calculated risk-management approach among sophisticated investors: while the fundamental carry opportunity remains intact on a yield basis, the concentration of event risk around an election with meaningful outcome uncertainty has made position reduction the prudent course for institutions managing volatility-adjusted returns.
Portfolio managers across several institutions have taken defensive action. VanEck's David Austerweil and Eric Fine have reduced positions in Brazilian local fixed income, while Vontobel's Thierry Larose has moved to an underweight position in the real itself. Aberdeen's Kieran Curtis has similarly been cutting currency exposure. For these managers, the decision reflects not necessarily a bearish call on the election outcome, but rather a prudent reduction in vulnerability to the volatility expected during the election period.
The carry trade has thrived on Brazil's persistently high domestic interest rates, which allow foreign investors to earn substantial yields by funding positions in lower-yielding currencies. However, the political dimension introduces a secondary risk layer. Although incumbent President Luiz Inacio Lula da Silva currently leads opinion polls and is viewed as the favourite, with betting markets assigning him roughly a two-thirds probability of securing another term, the contest carries material uncertainty. Some surveys indicate the race could be considerably closer than consensus polling suggests.
The deeper concern for investors centers on Brazil's fiscal trajectory. A Lula re-election has revived questions about whether the government will implement—or be able to implement—measures capable of stabilizing public finances. This concern is not theoretical: in late 2024, a sharp loss of investor confidence sent the real to a record low and triggered a broad selloff across Brazilian equities, local-currency debt, and hard-currency obligations. Recent polling movements have already produced measurable market reactions, suggesting that even incremental shifts in political probability can move asset prices materially.
The current pullback reflects a calculated risk-management approach among sophisticated investors: while the fundamental carry opportunity remains intact on a yield basis, the concentration of event risk around an election with meaningful outcome uncertainty has made position reduction the prudent course for institutions managing volatility-adjusted returns.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.