Now is the time for private fixed income referenced to the IPCA; Manager gives three reasons – 04/08/2023 – From Grain to Grain

This past Wednesday, we organized a meeting with the CIO of ARX Investimentos, Pierre Jadoul. At this meeting, we discussed two aspects that have been afflicting fixed income investors: the stress in the credit market and the choice between fixed income referenced to the CDI and the IPCA.

The chart below presented by Jadoul at the meeting illustrates the reflection of credit stress on spreads fixed-income securities.

O spread credit is the additional return that private credit securities pay above the CDI. This one spread of infrastructure companies is identified in the bottom gray line, which rose in the last quarter to the level reached in the 2020 pandemic.

He points out that this rise in spread was mainly caused by the lack of information from individual investors. These, afraid of news of companies in financial difficulty, such as Americanas, Light and others, ended up asking for funds to be redeemed. These funds need to sell the securities on the market at any price, as they have to pay the requested redemptions. This promoted the rise of spreads and created an opportunity in this fixed income market.

As he describes it, net redemptions have already been exhausted and spreads start to recede. In addition, two other factors contribute to the retreat of spreads. First, companies reduced new bond issuance, therefore decreasing the supply of new bonds and improving the balance between demand and supply. Second, bank treasuries, seeing the opportunity in high returns, start buying.

As he explains, banks take advantage of the greater one-off flow of investors by investing in CDBs and selling them with lower rates of return. This same resource captured by banks ends up being reinvested in private securities with higher returns that individuals sold through fund redemptions.

The manager points out that the last times there was a moment as favorable as the current one were in 2016, in the stress caused by the impeachment of former President Dilma and in the pandemic, in 2020. In both moments, those who took advantage were rewarded.

Jadoul believes that there is a lot of premium on the yield curve and as he states: “as the government advances in approving the fiscal framework and the tax reform, it removes uncertainty from the scenario and this tends to reduce pressure on longer interest rates and contribute to the Central Bank’s decision to cut interest rates.”

Therefore, investors who invest in securities linked to the IPCA would benefit from the drop in interest rates that should occur in the second half of this year.

Thus, the investor who invests in private bonds referenced to the IPCA would benefit from two sources of gains: the fall in interest rates and the fall in spreads credit.

Finally, Jadoul explains ARX’s study and illustrated in the graphic above. The study points out that investors who invest in federal government bonds referenced to the IPCA and with maturities of less than five years, measured by the Anbima IMAB5 index, have never lost the CDI in five-year windows since 2012.

If you consider the existing premium on corporate bonds and the current level of interest rates, this probability of success in these bonds is even greater.

I warn, however, that private securities are risky assets. Therefore, care is needed in the selection and high spraying in the investment. It is also recommended to invest in them through fixed income funds, as this way, you have a specialized team to select and monitor investments.

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

Talk directly to me via email.

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