(Bloomberg) -- Brazil should be a paradise for investors betting on lower swap rates. With stunningly high real rates and inflation on the decline, a trade that benefits from falling interest rates is a no-brainer.  

Instead, the so-called receiver positions have been burned.

Swap contracts maturing in January 2027 have jumped 185 basis points in the second quarter — almost double the moves in similar maturities in Mexico and Chile in the same span. Over the last week, stops were so massive that the curve not only erased chances Brazil will continue to cut rates, but is now showing they’ll rise by almost 65 basis points this year.

“To me it doesn’t make any sense to price hikes by September, but one can’t fight the market”, Alejandro Cuadrado, head of global FX and Latin America strategy at Banco Bilbao Vizcaya Argentaria SA in New York. “These moves with no data are untradeable, have been for a little while.”

Brazil’s curve started to move higher amid a global move as traders delayed prospects of rate cuts in the US. But in April, markets — who never fully believed in the country’s new fiscal framework — began to spot signs the government wouldn’t deliver on its targets.

It began when Finance Minister Fernando Haddad announced that for 2025 the administration would aim at zeroing the deficit, less ambitious than his initial plan for a 0.5% surplus. That triggered the first wave of stops across swaps. 

The move was then exacerbated by the central bank’s split rate decision in May, which had all four policymakers appointed by President Luiz Inacio Lula da Silva voting for deeper cuts. That put into question the monetary authority’s commitment to inflation once governor Roberto Campos Neto leaves by year-end. 

The last blow to the trade came in the past week, which saw Haddad express concern about the country’s fiscal outlook during a closed meeting with investors and Lula pushing for lower borrowing costs and increased tax revenue, which investors read as a sign spending cuts are not on the table. 

Brazil, along with Mexico, saw a major relief later in the week after several days of continuous stops, and strategists at Bank of America Corp. recently flagged that the volatility has created “significant mispricing” that could favor bets on lower rates. 

But to some, it may not be enough to compensate for substantial losses seen in the past few months.

“For us to turn bullish on Brazil rates, that would require Lula embracing a cutting-expenditure agenda in a more explicit way” said Bruno Carvalho, a founding partner and portfolio manager at hedge fund Asset 1 Investimentos Ltda. “That’s still missing.”

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