Lula’s comeback win forces Brazil to pause bond sales as real falls 10.5%

Luiz Inácio Lula da Silva defeated Senator Flávio Bolsonaro in Brazil’s second-round election, securing a fourth term as president. The result reversed a first-round loss and created immediate friction in financial markets, which had priced in a rightward shift. Bolsonaro refused to accept the outcome overnight, stating he would seek to annul the vote and calling a two-hour extension of voting hours unacceptable.

The Superior Electoral Court counted nearly all ballots by Sunday, showing Lula with 51.8% of valid votes and Bolsonaro with 48.2%. This marks the first time since Brazil resumed direct elections in 1989 that a candidate won the runoff after trailing in the first round. The 80-year-old leftist now holds a mandate to govern from 2027 to 2030, facing a Congress where Bolsonaro’s Liberal Party controls the largest bloc in decades.

Markets reacted immediately to the unexpected result. The iShares MSCI Brazil ETF dropped 25% at 10:30 a.m. ET, prompting an automatic circuit breaker on the local stock exchange. The Brazilian real fell 10.5% against the U.S. dollar, reaching its lowest level since December 2025 according to LSEG data. Major U.S.-listed Brazilian companies saw sharp declines, with Petrobras down 16%, Itaú Unibanco down 20%, Ambev down 10.3%, and Embraer down 5%.

In response to the volatility, the Brazilian Treasury canceled auctions of inflation-linked and fixed-rate government bonds scheduled for Oct. 27 and Oct. 29. A notice stated the Treasury would monitor conditions to ensure the proper functioning of the bond market. An auction of Treasury Financial Bills scheduled for Oct. 27 remains on the calendar. This pause reflects investor concerns about fiscal policy and the handling of state-owned enterprises under Lula’s leadership.

Lula’s previous terms, 2003 to 2011 and 2023 to 2026, coincided with rising public debt and double-digit interest rates. He has pledged to extend the Bolsa Família welfare system and shorten the working week without pay cuts. Chris Turner, head of EMEA and Latam research at ING, noted that a 7-8% budget deficit and a 70% net debt-to-GDP ratio make Brazil vulnerable in a global bond sell-off. Turner added that the market must now contend with these campaign pledges rather than the fiscal consolidation expected under Bolsonaro.

Analysts at Goldman Sachs expect modest measures to contain spending growth, alongside further increases in an already high tax burden, while major structural reforms remain unlikely. Citi analysts warned that banking stocks would face pressure if interest rates remain higher for longer, delaying the normalization of banks' asset quality. Alejo Czerwonko, a fellow at the Atlantic Council, said Lula’s administration will likely continue a gradual approach to stabilizing the debt trajectory while preserving social spending.

The election process included allegations of voter suppression, with Lula’s campaign reporting suspended public transport in key areas. Supreme Court Justice Cristiano Zanin extended voting by two hours, a move Bolsonaro’s campaign also requested due to heavy rains in the south. The outcome blocks a rightward shift in Latin America that U.S. President Donald Trump had supported, calling Bolsonaro’s earlier lead a significant victory. Trump has publicly sparred with Lula in the past.

Regional leaders reacted to the result with congratulations. Peruvian President Keiko Fujimori called the victory a democratic day for the Brazilian people in a post on X. Uruguay President Yamandú Orsi spoke with Lula by phone, referring to him as a friend. These reactions highlight the diplomatic dimension of a domestic election that has reshaped the region’s political alignment.