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NEW YORK, May 12 (IFR) - Brazilian credit markets were giving back gains on Thursday after an initial pop following news that the country's Senate had voted to put President Dilma Rousseff on trial.
The country's bond markets have enjoyed a strong rally leading up to Congress's decision to carry out an impeachment process.
But investors are holding judgment at this stage given the enormous difficulties faced by the new president in pulling the economy out of its worst recession in decades.
"We have come so far," said a New York based trader. "People are buying the rumor and selling the fact. Now the hard part begins."
After hitting an intra-day high of 105.00-105.25 earlier in the session, the country's 2026s have now slipped back to 104.75-105.00.
Those bonds have climbed a good seven points since March 16, when they were spotted at 97.75.
It is a similar story with Brazil's five-year CDS which is now trading back at 328bp-332bp after tightening to 316bp earlier Thursday morning.
"If you were going long into this (impeachment process) you are probably supposed to ring the registers by now," said one New York based trader, who noted some profit-taking Thursday.
Investors are now waiting to see how Rousseff's successor, vice president Michel Temer, will proceed amid expectations that he will create a market-friendly cabinet.
Temer has already pleased markets with plans to appoint former central bank president Henrique Meirelles. But the country still faces considerable challenges ahead as the new government seeks to pass much needed fiscal measures.
"(Temer) will face enormous obstacles, as fiscal consolidation requires unpopular reforms and the Workers' Party (PT) and its left-wing constituencies will try to block any attempts to alter the status quo," Deutsche Bank analysts wrote in a report on Thursday.
Others think there is more upside to come.
"There are reasons to see improvements in spread levels," said Sean Newman, senior portfolio managers at Invesco. "If you think they can arrest the deterioration in public accounts, five-year CDS could break through 300bp." (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)