Opinion – Grain in Grain: Is it possible to earn 30% in a year with Treasury bonds?

This weekend, while browsing Instagram, I got an offer from three influencers promising 30% to 50% fixed income gains in a year. When you hear that this is done with government bonds, that feeling of greed runs up your spine. The offer is really tempting, but is it possible? If so, in what situation could they occur?

The name “fixed income” gives us an illusion. When we hear this term, we immediately think of low risk. If it’s in government bonds, we think there’s no way to lose. But that’s not true.

Most people fall into financial traps, because when they hear about return they forget about risk.

No gain above CDI or Selic is realized without some type of risk that could lead to earning less than these indices. This loss can only be for a time or even for the entire investment term.

Let’s answer the first question: Is it possible to earn 30% in a year, investing in federal government bonds?

As I wrote yesterday, the average of federal public securities maturing in more than 5 years is accompanied by the IMAB5+ index, which is calculated by Anbima.

The table below shows that in the last ten years, the IMAB5+ has appreciated by more than 30% in the years 2012, 2016 and 2019. Therefore, the answer to the question is yes. In one year or another it is possible. Especially after moments of crisis.

However, usually when this happens, as you can see in the table above, you would also gain from other risky investments, such as the Ibovespa or real estate funds.

So what you bought in these three years was risk. That is, as it worked, you won, but if it had gone wrong, you would have lost. Yes, this type of fixed income in this case is risky, as it has a high price fluctuation in the short term.

Risk can be measured by the volatility or dispersion of returns. This volatility is shown in the second row of the table. Note that the risk of real estate funds is not very different from the average of Treasury bonds with a maturity of more than five years, represented by the IMAB5+.

Even if you measure Sharpe, that is, the index that measures return per unit of risk, you will see that in the case of real estate funds, Sharpe was better in these three years.

Maybe you ask yourself the second question: what needs to happen to have this gain?

Note that the CDI was lower in the year following each of the three years. That’s the answer. This gain in fixed income occurs when there is an expectation of a sharp drop in the Selic rate in the following year.

This actually occurred in the years 2017 and 2020.

However, there may be a frustration in this expectation, that is, it was expected that the Selic would fall, but it did not happen as expected. If this occurs, the rise is followed by a fall, as occurred in 2013.

In this case, the 34.2% appreciation of the IMAB5+, which took place in 2012, was followed by a loss of 17.1% in 2013.

As I mentioned yesterday, the Brazil risk is historically high and has raised the entire yield curve.

Where there is risk, there is usually a premium. But, this award may take a long time to materialize.

Additionally, the possibility of 30% gains in fixed income occurring now is very low, as the Central Bank has not even ended the cycle of interest rate hikes.

The market still expects increases in the Selic rate at least in the next two meetings of the Monetary Policy Committee (COPOM).

Therefore, be very careful with promises of fixed income gains as high as twice the CDI or Selic.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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