Opinion – Grain in Grain: Four ways to invest in fixed income to protect against inflation

Next Friday, one of the inflation indices most followed by us Brazilians, the IPCA, will be released. The data to be presented indicates what happened in the last month, that is, it is already in the past. However, the recent rise in commodity prices, caused by the war in Ukraine, changed the outlook for this index for the remainder of the year. I explain below how to invest in fixed income to protect yourself from further price increases in the short and long term.

The expectation for the IPCA to be released next Friday points out that prices in February rose 0.94%. With this number, inflation accumulated in 12 months will rise to 10.46% per year.

According to a survey by the Central Bank, in this week’s Focus report, economists expect the IPCA to drop to 5.6% per year until the end of 2022. This projection seems very optimistic. The escalation of energy and food prices around the world should change this projection upwards.

When we talk about fixed income investment to protect against inflation, the image of a straight line that always goes up and has no volatility comes to mind.

However, it is important to understand that investments referenced to the IPCA suffer price fluctuations due to the variation in the yield curve negotiated in the market.

In this case, the longer the bond’s maturity, the greater its sensitivity to the variation of the yield curve.

I emphasize that the yield curve already includes the increase in the Selic rate. Therefore, it is not with the increase in the Selic that it varies, but with the surprises that can promote a change in the previous expectation for this yield curve. For example, the recent jump in commodity prices has already caused the yield curve to rise.

Bonds may also suffer from the increase in the risk premium for fear of fiscal imbalances by the government.

So here’s the main lesson for today. If you don’t want to suffer from fluctuations in bond prices, prefer assets that are marked in your portfolio on the acquisition curve.

Securities marked on the acquisition curve will always yield interest plus inflation. Every day they will present the return by the combined interest rate on the investment and present inflation.

I warn that the investments referenced to the IPCA marked to market have presented low or negative performance in the short term. This volatility occurs due to the oscillation of the yield curve that I explained above.

However, this does not mean that you did not earn the highest IPCA yet. If you stay until the bond matures, you will earn all the inflation for the period, plus the interest rate when you purchased the bond.

Public titles

It is not just any public security that must be purchased at this time and it is not enough for it to be referenced to the IPCA.

In this moment of political instability, it is risky to invest in long-term bonds, longer than 5 years, due to the volatility I mentioned. Their variation will be much more influenced by interest rate movements caused by political and fiscal noise.

Prefer bonds with short to medium term maturities. Also, prefer to invest in these securities with the possibility that they will be marked on the acquisition curve.

The average of federal public bonds marked to market lost 1% in the last 12 months. The average of long bonds with more than 5 years depreciates 6.5% in one year. It doesn’t seem to make sense, considering the IPCA is as high as it is now.

But, be patient if you purchased it, as this will be recovered and you will receive the IPCA of now plus the acquisition interest rate if you wait until maturity.

In the long term, as shown in the graph above, public bonds referenced to the IPCA pay much more than inflation, despite the short-term volatility presented when they are marked-to-market.

private bonds

For private bonds, you should follow the same strategy as for government bonds. However, these have additional advantages.

Private bonds have a premium over government bonds. This premium can raise real interest by up to 20%, that is, interest above inflation that it earns when compared to government bonds.

For example, the IPCA 2026 Treasury has an IPCA rate + 5.61% per year. However, you must subtract the CBLC custody fee from this remuneration. Thus, the return it receives, still gross of IR, will be IPCA + 5.41% per year.

There are CDBs with the same term with a return of IPCA + 6.5% per year. Hence, a 20% higher rate of return above inflation.

That extra return makes a big difference in the long run. For example, considering an inflation of 5% per year, in 15 years, an investment of R$ 10 thousand in the above public bond will result in a value of R$ 45.8 thousand. However, the same investment in the CDB above will result in an amount of R$ 53.5 thousand.

In addition to the higher remuneration, an extraordinary advantage of CDBs over government bonds is the fact that they are marked on the acquisition curve. Thus, the investor more easily perceives the protection effect for inflation.

There are also IR-exempt private securities such as CRIs, CRAs and incentivized debentures. These, in addition to the private credit risk premium, also add the benefit of IR exemption.

I prefer CDBs, as they have greater security than these latter private securities, when the investor invests within the guarantee of the FGC.

investment funds

Fixed-income funds referenced to the IPCA whose average term of securities is up to 5 years can also be used.

Look for funds that have as a reference index (or benchmark) the IMA-B5. The portfolio of this index is composed of public securities referenced to the IPCA with maturities of up to 5 years.

Be careful not to get confused with the IMA-B 5+. This is formed by long-term bonds.

The average term of bonds in the IMA-B 5 is two and a half years. This is the advantage of the funds that pursue this benchmark. You invest in a portfolio of bonds, not a fixed bond.

If you invest in private credit funds, you can have the same profitability advantage for these securities mentioned above. Also, for some funds you may have the IR exemption.

The advantage of the funds is that they have a manager to select the securities with the highest premium and reduce credit risk through diversification.

real estate funds

Typically, real estate funds are considered equity investments rather than fixed income.

However, receivables real estate investment funds (REIFs) can be considered fixed income investments as their investments are in private fixed income securities.

They would be comparable to fixed income funds that invest in private bonds.

There are more than 20 receivables FIIs traded on B3, but most are recent. They do not have more than 4 years of existence.

More recently, equivalent products were launched with investments in fixed income securities related to the agribusiness market, known as FIAGRO. These also meet the same criteria.

There are two advantages of receivables FIIs. First, its dividends are tax-exempt. Additionally, many of them invest in private issues with a higher return than those that are distributed in retail.

In some portfolios of receivables FIIs, you have securities that, on average, have a yield of almost IPCA + 8% per year, exempt from IR.

As the portfolio of these funds invests in fixed income securities referenced to the IPCA, in the long term they benefit from inflation, as shown in the three examples above, which have been in existence for more than five years.

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

(Follow and like De Grão em Grão on social networks. Instagram.) ​​

If you have questions or suggestions for topics that you would like to see commented on here, please feel free to send them by email.