Brazil's Treasury says policy on tax-exempt bonds could be adjusted if excessive issuance observed

BRASILIA, Oct 29 (Reuters) - Brazil's government could revise its policy on income tax exemptions for private debt securities if issuance becomes excessive, a senior Treasury official said on Wednesday, amid ongoing pressure on sovereign bond yields.

Strong demand for tax-exempt private bonds has forced the Treasury to offer higher yields on inflation-linked sovereign notes to stay competitive.

Speaking at a press conference, public debt coordinator Helio Miranda said the Treasury had indeed seen pressure in the bond market this year, slowing the issuance of inflation-linked bonds, known as NTN-Bs, when it sensed market strain.

According to Miranda, tax-exempt securities have experienced a "very large" increase over the past five years.

Asked about possible limits on tax-exempt bonds after Congress let a proposal to raise their tax rate to 5% expire, he said: "If an excessive volume is observed, we can indeed adjust the policy."

Sovereign bonds are currently taxed at 22.5% to 15%, with rates decreasing over the holding period. The lapsed bill also sought to unify that rate at 17.5%.

Treasury data showed the average annual yield on inflation-linked bonds rose to 7.43% in September, the highest real rate since the series began in January 2021.

The average cost of overall domestic debt issuance over the past 12 months climbed to 13.74%, the highest since November 2016, when Brazil was going through its worst recession on record amid deep concerns over fiscal policy.

In September, Brazil's public debt fell 0.28% from the previous month, to 8.122 trillion reais ($1.50 trillion), as net redemptions outpaced interest payments.

Year to date, however, federal debt has risen 11.02%, or 805.94 billion reais, with 77.2% of the increase driven by interest payments and the remainder by net bond issuance to fund government spending.