Opinion – From Grain to Grain: For retirement, is it better to invest in the IPCA Treasury with short or long maturity?

When I was young, there was practically only one fixed income. Some readers may remember that, in the past, fixed income was synonymous with overnight. Today, there are a multitude of alternatives for fixed income investing. In this article, I’m going to address just two options that I’ve been getting the most questions about lately.

The question I have been receiving is how does the title of this article form: if I intend to invest and maintain it for 10 to 30 years, that is, for retirement, is it better to apply in the federal public bond referenced to the IPCA with long or short maturity?

This is an excellent question. Unfortunately, there is no single answer. The answer depends on a few factors. I will evaluate two of these factors.

First, with regard to reinvestment risk. Rather, what is this risk?

Reinvestment risk exists when you decide to allocate to a short bond and when it expires, you are unable to reinvest at the same rate as before.

Today, the rate of return on a short bond, for example, the Treasury IPCA+ 2026 is IPCA+5.51% per year. This bond matures in 2026. Therefore, it could be considered a short-term bond.

The IPCA+ 2045 Treasury bond is traded at IPCA+5.78% per year. This bond matures in 2045, therefore, it is a long-term bond.

The difference between the two is reasonably small, ie only 0.27% per year.

There is a risk that when the short bond expires in 2026, you will not get the same rate. In the future, you can reinvest at a higher or lower rate. There’s no way to know.

So, if you want to reduce your risk by reinvesting at a lower rate, then you are better off investing in the long bond today.

If you believe that this risk is low, that is, that rates can fall and rise, but they will be systematically around IPCA+5.5%, then your decision goes to the second factor.

The second factor concerns your investor profile.

If you have a conservative profile, prefer the shortest maturity bond.

Interest rates vary over time and have been above IPCA+7% per year in the recent past.

Shorter titles have much less variability. Therefore, the conservative investor will suffer less from fluctuations if he invests in a short-term security.

Already the most aggressive, can apply in long titles. These bonds have the ability to produce higher returns, for example more than 30%, in the short term if interest rates fall.

This potential premium comes with a swing cost. Long bonds can show losses of more than 20% in the short term.

But what happened in the past? What was the best decision in the last 15 years?

To assess this, we are going to use Anbima’s indices.

The IMAB5 is the index of federal public securities with maturities of less than 5 years. Its average term is close to 2 years. That is, it would be like buying a 2-year bond for maturity.

The IMAB5+ is the index of federal public securities with maturities greater than 5 years. Its average term is close to 12 years.

So we would be comparing over the last 15 years what the outcome was between buying a 2 year bond to maturity or a 12 year bond.

In the last 15 years, IMAB5 and IMAB5+ have yielded the equivalent of 8.7% and 9% per year, respectively.

But while the short-maturity index never showed a negative return in any year, the IMAB5+ lost more than 17% in one of the years and had variability more than 3 times higher than the short-maturity index.

If the past is the best explanation of what might happen in the future and you don’t intend to get rid of your investment in either scenario until maturity, then the most sensible thing to do is stick with the short-term bond. In this one, you will get pretty much the same return as a long bond, but with much less suffering from fluctuation over time.

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

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