Although economists still believe that inflation, measured by the IPCA, will decline to 4.7% in 2023, the financial market is already betting that it will be 7% per year for the next 10 years. With this uncertainty, what is the most recommended investment?
The communiqué from the last meeting of the Monetary Policy Committee (COPOM), which raised the Selic rate to 13.25% per year this past Wednesday, showed that there is a great disparity in expectations regarding future inflation.
The memorandum released after the COPOM decision portrays the expectations of economists stating that “inflation for 2023 and 2024 calculated by the Focus survey is around 4.7% and 3.25%, respectively.”
However, more optimistic than economists, COPOM, which is a group formed by eight directors of the Central Bank and its president, declared that: “In this scenario, COPOM’s inflation projections stand at 8.8% for 2022 , 4.0% for 2023 and 2.7% for 2024.”
Economists and BC believe that 2024 inflation will be less than 3.5%. However, those who have something to lose and actually put their own money at risk are not trusting these projections.
Investors are betting that 2024 inflation will be close to 7% a year, just like every year for the next decade. They expect inflation equivalent to twice the expectations of the BC and economists. Someone seems to be very wrong.
This investment by investors can be seen in the inflation implicit in government bonds. Anbima publishes, daily, a report that makes this calculation for you (link).
The table below, extracted from the report, demonstrates this expectation. The table is built from the rates of federal public securities traded on the market and is made up of four columns.
The first contains the term of each respective interest rate. The second and third columns present, respectively, the rate of an IPCA-linked and fixed-rate security for each term. The last column indicates the implicit inflation between fixed rate and IPCA-referenced securities.
For example, the period of 1260 working days represents five years. For this period, the rates fixed and referenced to the IPCA are 12.63% and 5.41% per year. To calculate the last column, just add 1 to the two rates and divide one by the other. Thus, 1.1263/ 1.0541 = 6.85% per year.
Break-even inflation for the next ten years is in the last row and column and is 6.9959% per annum. This inflation is very high. I’ll put it in a different perspective so you understand.
An IPCA of 7% per year for the next decade means that the average price of goods and services will double at the end of 10 years. That’s right, the price of an item you buy today will be worth twice as much in a decade.
You know when you nostalgically remember how much you paid cheaply for something in the past? This sensation will repeat itself over and over again.
Undoubtedly, with the current uncertainty about global inflation, the safest option remains to prefer IPCA-referenced bonds when the maturity is longer than two years. With these, you guarantee that your investments will always be yielding more than inflation.
However, if you believe that investors are wrong and the BC is right, fixed-rate bonds are a better alternative than IPCA-referenced bonds for the same term.
For the short term, there is also the alternative of taking advantage of the highest CDI rate at the moment. After all, it is still higher than the prefixed long rates. While the CDI is above 13% per year and is expected to rise even more, the table shows that fixed rate bonds yield less than that for terms of more than two years. In other words, there does not seem to be much premium in taking long-term risk in fixed-rate bonds.
Michael Viriato is an investment advisor and founding partner of Investor’s House
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I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
