Opinion – From Grain to Grain: Which is better: a treasury bond yielding 11.5% per year or IPCA + 5.5% per year?

The recent rise in the Selic rate brought back interest rates that had not been seen for over four years. While until last year, investors had no doubts about rescuing from fixed income and adding risky assets to the portfolio, the question now is which fixed income security is best to have in the portfolio. One of the doubts is related to the choice between fixed or IPCA-referenced remuneration. I explain below what you need to evaluate to decide.

As the title’s question puts it, I’m going to use the federal public bonds referenced to the IPCA and fixed rate. These securities are sold on the Tesouro Direto platform or at brokerage desks.

Everything that I am going to explain for the federal public bond also applies to the decision between CDBs. But for the latter, when the CDB is from a medium bank, the profitability is higher.

For example, while Treasury bonds maturing in 2026 have a return of 11.5% a year or IPCA+5.5% a year, in CDBs you can find a return of 12.5% ​​a year or IPCA+6% a year. year.

This difference in profitability between public and private bonds is due to the credit risk of the issuing bank. It is important to remember that those who invest less than R$250,000 per issuer are guaranteed by the FGC. Therefore, for these cases, the risk is mitigated and the average bank CDB is unbeatable in relation to government bonds.

Let’s go back to our objective of explaining how you can decide between fixed-rate compensation and IPCA.

The decision between bonds should not only consider the return that is presented today, but what should happen with inflation in the coming years.

The selection process is simple, but it will require you to make a bet on what is implied by the yield curves at each point in time until the bond matures. The Anbima website helps you with this calculation.

Anbima updates the table below, available on the link, daily. In this table you will find the equivalent rate for the IPCA Treasury and the fixed rate Treasury for each term.

In the table above, I placed the National Treasury bonds maturing in 2026 and 2033.

In the last column of this table, there is the inflation rate implicit in the fixed-rate security, which makes it equivalent to the IPCA-referenced security, of the same maturity. The decision between IPCA or fixed rate lies in how its perspective diverges from this implied inflation.

Let’s use bonds maturing in four years (2026) to illustrate. If you believe that today’s inflation up to six years ahead will be more than 5.7% per year, you should prefer the inflation-linked bond. But, if you think that inflation, in the same period, will be less than 5.7% per year, you should prefer the fixed rate bond.

The yield on the fixed rate security is the composition of the IPCA Treasury rate and implicit inflation. For example, with the sixth grade title: 11.5% = (1 + 0.055) * (1 + 0.057) – 1.

Therefore, if you believe that inflation in the next four years will be 6.5% per year, if you buy the inflation-linked bond, you will earn 12.36% = (1 + 0.055) * (1 + 0.065) – 1. So , more than today’s fixed rate bond yield of 11.5% per year.

Otherwise, if you suspect that inflation in the next six years will only be 4% per year, it is better to buy the fixed rate bond today of 11.5%. This is because the IPCA-referenced security will yield only 9.7% = (1 + 0.055) * (1 + 0.04) – 1.

It is necessary to consider that the security referenced to the IPCA has an element of protection in case the worst happens, that is, inflation surprises.

As we have seen, the choice process is simple, but to arrive at the right decision, you need to have a good forecast about inflation in the coming years. Comment here what your perspective of annual inflation in the next four years and in which security you should invest.

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

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