Opinion – From Grain to Grain: Understand which option for fixed income is better: mark-to-market or on the acquisition curve?

Some choices seem obvious until we try them out. One of these choices has been bitter for some investors, but is about to be tried out by others. I explain what this choice is and which one I prefer.

There are two ways of accounting for prices of fixed income securities in investors’ portfolios: the market or the acquisition curve.

Most financial institutions reprice fixed income securities in portfolios using acquisition curve pricing. In this methodology, the price of a security today is equivalent to the price of yesterday, corrected by the interest rate contracted when the initial investment was made.

This means that if you invested in a prefixed fixed income security with a yield of 10% per year, every day it will yield 0.038%. At the end of a year, it will have yielded 10%.

In market pricing, the security’s price today is related only to the value resulting from the demand and supply that it had today in the market. That is, the rate you initially contracted is only guaranteed at maturity, but not in the interim period.

In marking the acquisition curve, a fixed income security will hardly have negative yields in short periods such as one month. With mark-to-market, a fixed-income security may show negative results for long periods, for example, longer than 2 years.

The chart above illustrates an example that some investors are experiencing. On the Treasury Direct platform, public securities are marked to market. One of the most purchased securities on this platform in recent years was the Treasury IPCA main 2035.

Investors who bought this security on 07/31/2019 have practically the same amount invested today. It was almost three and a half years without seeing any return.

The same security marked on the acquisition curve would show an appreciation of almost 40% in the same period. This markup is displayed as the blue line on the graph.

As required by Anbima, as of 01/01/2023, all financial institutions must mark several private fixed income securities to market. However, some financial institutions give the option for the investor to choose which markup he wants.

At first, it seems obvious that marking to market would be the most appropriate. Possibly, you would justify wanting to know how much the market pays for your title.

However, what does it matter to know how much the market pays if you intend to carry it to maturity? In this case, it doesn’t matter if it’s on the market or on the curve, because in both cases you’ll earn the rate contracted at the beginning.

So why choose mark-to-market and expose the portfolio to more volatility? Higher volatility will only confuse. An example of this confusion is the graph above.

I bet those who applied for the public bond presented above and experienced the negative result of the last three and a half years know what to choose.

I have already chosen to mark fixed income securities on the acquisition curve.

Merry Christmas!

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

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