Brazil election: Aberdeen and Vontobel see fiscal credibility deciding the runoff after Bolsonaro’s surprise lead
5 OCT, 2026
By Joanna Piwko from RankiaPro Europe
Flávio Bolsonaro's surprise lead in the first round of Brazil's presidential election on Sunday 4 October has shifted market expectations ahead of the 25 October runoff, but fiscal credibility remains the decisive test. That is the view of Viktor Szabó, Investment Director, Fixed Income, at Aberdeen Investments, and Thierry Larose, Portfolio Manager and Analyst in Vontobel's Fixed Income Boutique.
Bolsonaro took 47% of the vote against 45.2% for incumbent Luiz Inácio Lula da Silva, defying polls that had given the president the edge.
A shift to the right that reshapes Congress
The upset was not limited to the presidential race. Right-wing parties posted their strongest congressional result in decades, a change that, according to Aberdeen Investments, alters the arithmetic of coalition-building for whoever wins on 25 October.
The first round marked a clear shift to the right. [...] Right-wing parties also posted their best result in Congress in decades [...], while party fragmentation fell to its lowest level in the past decade. This should make coalition-building considerably easier for Bolsonaro and much harder for Lula.
Viktor Szabó, Investment Director, Fixed Income, Aberdeen Investments
For Vontobel, the Senate outcome may prove even more consequential than the presidential vote, because the upper house confirms Supreme Court justices and the next president will have several seats to fill.
The PL, Flávio Bolsonaro's party, will hold 28 of the 81 seats from February 2027, up from 15 today, and, together with its closest allies, the right will have the absolute majority of 41 votes, the threshold needed to elect the Senate president and confirm Supreme Court justices. This matters because the next president will be able to appoint up to four of the eleven justices during their term.
Thierry Larose, Portfolio Manager and Analyst, Fixed Income Boutique, Vontobel
Bolsonaro the favourite, but Lula is still in the race
Both managers expect votes from the eliminated centre and centre-right candidates to favour Bolsonaro. Larose notes that the latest polls had forecast a Lula lead of between 1 and 5 percentage points, while the incumbent has already consolidated the vast majority of the left-wing electorate.
Szabó, however, warns against writing off the incumbent, pointing to recent votes where pre-election spending failed to keep governments in power, as in Colombia's elections earlier this year.
Lula has never lost a presidential election and continues to benefit from his incumbency, from increased Bolsa Família payments and from the proposed reduction of the working week currently being debated in the Senate. He now starts as the outsider, but remains competitive in what could become another election in which pre-election fiscal generosity fails to keep the incumbent in power, following the recent examples of Hungary and Colombia.
Viktor Szabó, Investment Director, Fixed Income, Aberdeen Investments
Fiscal credibility and local bonds
Brazilian local-currency assets reach the runoff on solid footing. Larose observes that 2026 has been a favourable year for them despite the conflict in Iran, with the real supported by carry and terms of trade, and local bonds helped by the monetary easing cycle, in line with the broader resilience of emerging market fixed income.
For Szabó, the fiscal question outweighs political momentum, and the next three weeks of campaign pledges will matter more than the headlines.
For markets, however, the central issue remains Brazil's fiscal outlook, its long-standing Achilles' heel. Lula's spending commitments are already well known; now Bolsonaro must show that market expectations of stronger primary balances and fiscal reform rest on credible proposals rather than electoral rhetoric.
Viktor Szabó, Investment Director, Fixed Income, Aberdeen Investments
Vontobel is cautiously constructive. Larose believes markets could give Bolsonaro the benefit of the doubt and price in a functional coalition of conservative and centre-right parties capable of the reforms needed to halt the debt snowball effect.
We consider that the nominal Treasury bond curve (NTN-F) offers an attractive combination of implied inflation expectations and term premium. In our assessment, yields could compress considerably more in a Bolsonaro victory scenario than they could rise with a Lula re-election. In our view, this creates a very attractive asymmetric risk-return profile.
Thierry Larose, Portfolio Manager and Analyst, Fixed Income Boutique, Vontobel
He sees a similar, though smaller, asymmetry in the Brazilian real, given the currency's strong performance over the past two years.Flávio Bolsonaro's surprise lead in the first round of Brazil's presidential election on Sunday 4 October has Yields could compress considerably more in a Bolsonaro victory scenario than they could rise with a Lula re-election. In our view, this creates a very attractive asymmetric risk-return profile.
