(Bloomberg) -- Across Brazil’s dilapidated credit markets, investors are starting to whisper a new mantra in the face of double-digit interest rates and corporate malaise: The pain can’t last forever.

The desperation for easier credit conditions is palpable nine months after central bankers in Latin America’s largest economy pinned their benchmark interest rates at 13.75%. Bond deals are still struggling to gain traction, bankruptcies are rising and investors keep on pulling cash out of Brazilian domestic bond funds. 

But in the wreckage of high borrowing costs and the aftershocks of century-old retailer Americanas SA’s collapse, inflation is starting to retreat. That’s raising expectations for a policy pivot that would reinvigorate the bond market.

“I think that the market has improved, but it’s important to caveat that things in Brazil change all the time,” said Bruno Stuani, a director at Plural Gestao, a Sao Paulo-based investment unit of Genial Investimentos. “We have a tendency to extrapolate things and think they will last forever.”

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While still delicate, that sense of relief is already starting to spread. Traders have boosted bets for the central bank to begin its easing cycle in August after annual inflation ebbed to 4.07% in mid-May from last year’s peak of 12.2%.

Even central bank chief Roberto Campos Neto, known for his cautious approach, said that he saw “positive signs ahead” in terms of the country’s inflation outlook — a welcome surprise for those who, like President Luiz Inacio Lula da Silva, want to see borrowing costs fall in Brazil. 

“The mood is being driven by the inflation factor and also a strong consensus that the US is nearing the end of its tightening cycle,” said Daniel Pegorini, chief executive officer of Sao Paulo-based investment firm Valora Gestao de Investimentos. “We are beginning to see a sustained reaction.”

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Subtle Signals

For now, though, any real change in markets is limited to perception.

The extra yield demanded to hold local inflation-linked securities over US Treasuries remains far higher than it was at the turn of the year, though it narrowed slightly in May, according to data compiled by ABC Bank Research.

The same goes for signs of thawing in the nation’s primary debt markets. Brazilian companies and authorities have sold just $12 billion of bonds in global and local markets this year through the end of May — a 51% drop from the same period of 2022, according to data compiled by Bloomberg. 

The silver lining is that corporate bond sellers are again starting to test investor sentiment with new deals in the pipeline. Oil and gas company 3R Petroleum Oleo e Gas SA said this month it approved a plan to sell 3.5 billion reais ($695 million) of local notes, while construction firm Aegea Saneamento e Participacoes SA is working with banks to issue at least 3 billion reais of domestic notes. 

Either deal — if actually priced — stands to become the largest real-denominated bond sale since before Americanas uncovered a $4 billion accounting hole that led it to file for bankruptcy protection and caused banks to pull back on lending. 

That scandal, Plural Gestao’s Stuani said, is to blame for some of the extra scrutiny on companies that ask to borrow. 

“But as we move further away from the event, there were no other similar cases,” he said. “The market tends to become more confident.”

--With assistance from Felipe Saturnino and Cristiane Lucchesi.

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