The Treasury and central banks

Two of the largest and most influential participants in any market are public, not private: the Treasury and the central bank.

The Treasury — the government as borrower

A government spends on schools, roads, health and defense, and it does not always collect enough in taxes to cover it. To bridge the gap, the Treasury (in Brazil, the Tesouro Nacional) borrows by issuing government bonds — IOUs that promise to repay with interest.

• These bonds are usually considered the lowest-risk asset in their own currency, because a government backed by the power to tax is the most reliable borrower in its economy.
• Their yield becomes the benchmark "risk-free rate" against which every other investment is compared.
• In Brazil, the Tesouro Direto program lets individuals buy these bonds directly, in small amounts — a popular entry point for new investors.

The central bank — the manager of the system

We met the central bank as a regulator; as a market participant it is just as powerful. It:

• Buys and sells government bonds (open-market operations) to steer short-term interest rates toward its policy target.
• Acts in the currency market to smooth excessive volatility and manage reserves.
• Serves as lender of last resort, providing emergency liquidity to keep the banking system from seizing up.

Why these two move markets

When the Treasury issues a lot of debt, or the central bank changes interest rates or intervenes, the effects ripple across bonds, stocks and the exchange rate at once. These are the participants whose decisions every other participant watches most closely.