BRL: Rebalancing risks build as carry crowded – BNY

BNY’s Geoff Yu highlights that Brazilian assets, including the BRL and IBOVESPA, have attracted strong inflows in February 2026, leaving total exposure stretched. Elevated real rates and strong fixed income performance are drawing capital, but this now triggers significant equity and fixed income rebalancing pressure. The bank warns that Brazil’s carry status faces growing hedging and asset-reduction risks.

Brazilian carry crowded across assets

"After a poor start to the year, the BRL was the best-bought EM currency in iFlow this month. Meanwhile, IBOVESPA enjoyed another solid month of inflows and looks set to end February up more than 25% year to date. Meanwhile, its fixed income market also performed very strongly (see below). Consequently, a strong rebalancing signal is in place."

"In fixed income, BRL rebalancing pressure is even stronger. That is no surprise given elevated real rates, which continue to attract inflows into Brazil and broader LatAm. Indirectly, Colombia’s rate hike may also have revived expectations of renewed tightening across LatAm."

"As indicated in the equity section, total asset exposure in Brazil is now excessive, and asset reduction may have to be part of the story for rebalancing. This may be less costly than significantly increasing currency hedges."

"Combined with equity rebalancing, BRL, ZAR and MXN are clearly at risk of hedging flows, or in the case of Brazil, complementing some asset reduction."

"However, with the Selic already highly restrictive in nominal terms, there is limited scope for acceleration without risking a serious political backlash."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)