Opinion – From Grain to Grain: What is the best fixed income index for 2022?

With a more volatile environment for risky assets and a less favorable outlook for next year, investors have been reflecting on an increase in the fixed income portion of their portfolios. At this point, the question arises, which is the best index for bonds or fixed income funds?

Usually, applicators evaluate where to apply by looking at past returns from applications. However, when looking at the past return of marked-to-market applications, confusion about which is best increases.

The table below shows the return in 2021 of fixed income investments, either through funds or bonds, and the variation in inflation.

When we invest in fixed income, we usually want to beat inflation. However, for marked-to-market bonds and funds, this was not possible this year.

Long-term treasury direct government bonds, for example, those maturing in 2045 show a negative return of 25% in 2021. In other words, they lose more than the Ibovespa, which drops 9.9% in 2021. Treasury with maturities over 5 years lose 6% this year.

For next year, a similar scenario may be repeated and only two of the above indexes have a greater chance of beating inflation when marked to market. So, beware of marked-to-market long-term fixed-income securities. They can exhibit higher volatility than the stock market.

So here’s the first tip. If you want to guarantee that you will beat inflation in 2022, prefer bonds that are marked on the curve, meaning that their price varies according to the acquisition rate and not the market.

This usually occurs with private bonds such as bank bonds (CDB, LCA and LCI), or corporate bonds (Debentures, CRIs and CRAs). The latter have more risk, as they are not guaranteed by the Credit Guarantee Fund (FGC).

What are the best indexers for next year?

The electoral scenario for next year and the uncertainty regarding the inflation trajectory favors investment in bonds with a maturity of less than 5 years.

This occurs because they suffer less from an eventual higher interest rate than expected.

Thus, the preference should be for bonds referenced to the IPCA with short-term maturities, mainly in funds and private credit bonds that promote higher returns and are marked on the curve.

But also fixed-rate securities maturing in up to two years or referenced to the CDI should also be considered. There is a possibility that inflation will cool down, thus benefiting these two indexers.

How much should the CDI yield and a bond referenced to the IPCA?

As shown in the table below, the market is already pricing the Selic rate and, consequently, the CDI rate should exceed 12.5% ​​per annum by mid-2022. However, as this increase is staggered, the CDI and Selic return should be only 11.7% in the year 2022.

The return of bonds referenced to the IPCA marked on the curve is unknown, as it depends on the variation in inflation.

The market expects inflation to be between 5% and 6% in 2022. Thus, a CDB with a real rate of 5.0% per year should appreciate between 10.25% and 11.3% next year. However, if inflation remains high, this return could exceed 15% in 2022.

As I mentioned, only the bonds marked on the curve should not disappoint with respect to the above-inflation return. The downside of these is the lower liquidity.

Why divide between them?

Inflation next year is still a big uncertainty. The Brazilian economy is highly indexed, that is, current inflation has a certain persistence. Therefore, there is much debate about whether the monetary tightening carried out by the Central Bank, raising interest rates, will have an effect in 2022 or just in 2023.

Therefore, it is important to have a balance between the indexes, but favoring short-term IPCA-referenced securities that are marked on the curve.

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