Opinion – From Grain to Grain: Is investing in a security that yields Dollars + 5.6% a year better than IPCA + 5.6% a year?

Among the main currencies in the world, the Real stands out in the last 12 months with an appreciation of 7% against the US Dollar. This appreciation raises the debate as to whether it is better to invest in a private fixed-income security that is corrected by the exchange rate variation or by the IPCA. I explain below what you need to consider when deciding.

Talking to several investors, I notice that there is an inconsistency between their expectations and preferences. Many investors prefer to invest in a dollar-denominated bond, but expect the Real to appreciate, which seems inconsistent.

The expectation of appreciation is due to the recent movement that the Real has shown. As can be seen in the chart below, the Real is the currency that appreciates the most against the Dollar in the last 12 months, among the main currencies, according to Bloomberg.

Yesterday I wrote about the process to choose between the fixed rate and IPCA remuneration. I explained that this decision should consider the difference between your inflation expectation and the implied inflation between fixed rate and IPCA bonds.

Today’s decision is a little more difficult. First, let’s establish the criterion for comparison.

Any comparison must consider securities of the same issuer, that is, of the same credit quality and of the same maturity.

Therefore, it is not possible to compare a company security, which has regular credit quality, with the CDB of a bank rated with the highest score.

Also, it makes no sense to compare the return on a 20-year bond with a 5-year bond. The interest rate risk on a long bond is higher. Therefore, possibly the long bond will have a higher expectation of expected return.

Considering this, let’s compare two issues by the Petrobras company. One abroad with maturity in 2031 and another in Brazil with a similar term, but referenced to the IPCA.

I collected the rate negotiated abroad with a partner brokerage. The Petrobras bond maturing in 2031 in Dollars was trading last week with a rate of return of 5.6% per year.

Thus, a Brazilian investor who invested in this security would gain the exchange rate variation (R$/Dollar) plus 5.6% per year.

Petrobras also has one debenture maturing on September 15, 2029 and another maturing in 2034. Both are referenced to the IPCA and trade at a rate of 5.6% per year. On the Anbima website, you can consult the rate of this debenture and other issues.

The decision must consider its expectation of inflation and exchange rate devaluation over the next nine years.

I understand that it is a difficult exercise. Although subject to errors, estimating the exchange rate variation in the long term is easier than in the short term.

In the long term, the exchange rate has been devaluation closely related to the evolution of inflation.

See in the chart above that, since the Real Plan, despite the exchange rate being more volatile in the short-term intervals, the currency has devalued practically the same as inflation.

However, the theory explains that the devaluation in the long run should approach the inflation differential between the two countries USA and Brazil.

Therefore, for two fixed-income bonds maturing in the long term, if their interest rate is the same, you should prefer the IPCA-referenced bond to the dollar-denominated bond. In order to decide on the bond in Dollar, in the long term, it should have greater profitability.

Therefore, it is not a trivial decision to invest in a dollar-denominated security, even if it has a higher rate of return than the IPCA rate. You need to consider that the currency should depreciate less than the IPCA and charge this difference in the interest rate.

Short-term decisions, on the other hand, are much more difficult, as they should adjust the movement of the exchange rate, which presents high volatility in the short term. As Minister Delfim Neto said: “the exchange rate was made to humiliate economists”.

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

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