After presenting an average devaluation of 1.26% in 2021, federal public securities referenced to the IPCA begin 2022 with losses until the end of February. To the discomfort of investors, this loss occurs precisely when inflation hits record highs. With the negative performance, investors are considering exchanging their IPCA-linked securities for others linked to the Selic or CDI. Although the latter also lose from inflation, at least they have a positive return. But is this a good trade-off?
The chart below shows the average performance of federal public securities referenced to the IPCA with maturities of more than five years and the CDI. If you invest on the Tesouro Direto platform, these securities are known as the Treasury IPCA.
Note that not only IPCA-referenced securities lose inflation and CDI rates, but also have a negative return in the last 12 months.
I usually explain to investors the advantage of investing in securities marked on the curve in relation to those marked on the market.
Mark-to-market securities may experience high volatility or price fluctuation. This oscillation is cruel. It undermines the confidence of investors who often change their investments for fear that they have made a wrong decision in the past and that they are missing an opportunity for not having a short-term return.
Even federal public securities referenced to the IPCA maturing in less than five years, which are less volatile, lose the CDI rate in the last three months.
With this performance, is it worth migrating to CDI or Selic-referenced applications?
The answer is related to your investment horizon. If your application horizon is less than one year. It is possible that bonds referenced to CDI or Selic present higher returns than bonds referenced to IPCA.
The yield on IPCA-linked securities is composed of two elements: the IPCA and a fixed rate. When the yield curve oscillates upwards, the fixed-rate portion of these bonds loses. This loss is often greater than the gain presented by the portion that yields the IPCA. Long-term bonds suffer even more at these times.
As the factor that caused the losses, which was the surprise in inflation, remains, it is possible that these securities will still present a return lower than the CDI in the short term.
However, as shown in the figure above, IPCA-linked securities should significantly outperform inflation and CDI in the long run.
The figure above shows that IPCA-linked securities maturing over 5 years (purple line) have returned 189% of the CDI (yellow line) since 2004.
On the other hand, IPCA-linked securities maturing in less than five years (white line) returned 145% of CDI in the last 18 years. This return was even higher than the average of multimarket funds (green line) in the same period.
Therefore, your decision to exchange your bonds is related to the investment term. If you can invest for the long term, you will be rewarded if you keep your IPCA-referenced securities. However, this will require a lot of cold blood and patience to withstand short-term volatility.
Michael Viriato is an investment advisor and founding partner of Investor’s House
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I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
