Opinion – From Grain to Grain: The Selic rate is high, but it should still lose IPCA+5%

To the surprise of all market economists, the Selic rate rose from 2% a year in March last year to 12.75% a year this May. Nominally, the rate is so high that it makes us wonder if there is something better with similar risk. I explain below which fixed income bond should be even better.

When we see such a high nominal rate, we forget that it only exists because of another element, inflation.

First, it is important to understand the difference between the nominal rate and the real interest rate. The nominal rate is the composition of inflation and the real interest rate. Thus, the real interest rate is the yield that is earned above inflation.

Don’t be fooled by the nominal rate level. It is high only because inflation continues to surprise upwards. As soon as inflation reverses, the Selic should begin to fall.

Therefore, the real gain should not be greater than 5% per year and if it reaches this level, it will be just before the Central Bank cuts interest rates. Therefore, it is not expected to make interesting real gains for a long time.

Inflation in the last 12 months is at 12.3% per year, that is, if this inflation persists, the current Selic rate of 12.75% per year presents almost no real gain.

A one-year fixed income bond referenced to the IPCA yields between 5% and 5.5% a year above the IPCA. With longer maturities or in private bonds, it is possible to obtain greater returns.

In the long term, this additional gain, in relation to the Selic, of short-term bonds linked to the IPCA makes a big difference.

See the simulation below with the IMA-B5. The IMA-B5 index is the index of public securities referenced to the IPCA and maturing in less than 5 years. The average term of bonds in this index is between 2 and 3 years.

As can be seen in the chart above, investment in the IMA-B5 has yielded 882.64% since 2003. In the same period, an investment in Selic or CDI would have appreciated by 561.73%. Therefore, an investment in short-term IPCA-linked securities has yielded 157% of the CDI since 2003.

Thus, investing in bonds referenced to CDI or Selic are more recommended for those resources with a short time horizon, that is, less than one year. For maturities greater than one year, it is better to maintain the security of IPCA-referenced securities for fixed income investments.

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

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