The Impact of Fiscal Noise on the DI Curve

Research evidence excerpt

The Impact of Fiscal Noise on the DI Curve

Idea

July 22, 2026 05:24 PM GMT

Morgan Stanley & Co. LLCMLatAm Macro Strategy | Latin America Ioana Zamfir

Strategist

The Impact of Fiscal Noise on Ioana.Zamfir@morganstanley.comSofia Palacios +1 212 761-4012

Sofia.Palacios@morganstanley.com +1 212 761-0428

the DI Curve

• While, historically, pre-election risk in Brazil has been reflected primarily

though the FX, we think that more risk premium could be reflected via local

rates in this cycle.

• We provide a simple proxy for bucketing the level of fiscals-related headline

noise in Brazil at any point in time and find that despite a structural pick-up

during the most recent administration, current levels remain "low" on a

normalized basis (and low tends to be the norm).

• We also find that the shape of the DI curve remains predominantly driven by

external factors and by the BCB even if "medium" levels of fiscal noise are

reached, to the extent that it reverts and does not extend into our "high"

noise category.

• Perhaps contrary to intuition, the high fiscal noise category has seen

flattening across the DI curve in 80% of instances, as it remains associated

with a spike in inflation risk premium.

• For now, we expect the steepening momentum in the DI curve to persist into

mid-August, especially in 2s5s (Jan 28 vs Jan 31), likely driven by the long end

but perhaps to a lesser degree than we have seen so far.

• That said, once election campaigning kicks off on August 16, we think that

the pick-up in fiscal noise could be sharp and sudden, suggesting that long-

end payers would likely offer more value than steepeners at that point. We

would look to re-assess our exposure closer to end-August.

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