Selic and CDI follow the downward trend observed between 2016 and 2018; see how to prepare – 03/20/2024 – From Grain to Grain

Since August 2023, today’s movement was the sixth consecutive reduction of 0.5% in the Selic implemented by the Monetary Policy Committee (COPOM) of the Central Bank (BC). This movement should continue at the same intensity at the next meeting in 45 days, that is, at the beginning of May. The movement is similar to the downward cycle that began in September 2016 and lasted until March 2018.

The graph below shows how the Selic Target rate has evolved since 2014. It is possible to observe that the long downward cycle that extended from 2016 to August 2020 was marked by three stages.

The first stage lasted from the end of 2016 until March 2018. In it, the Selic fell from 14.25% per year to 6.5% per year. The second period was of stability at 6.5% and lasted just over a year, until August 2019. Finally, there was another stretch in the fall until August 2020 when the Selic reached 2% per year.

It seems unlikely that Brazil will go through such a long and deep cycle of falling interest rates again. However, it would not be extraordinary to have a basic interest rate close to 8% per year in 2025. In other words, a movement similar to the first stage mentioned above, but with less intensity.

The internal conditions of today and that past moment are not very different. During September 2016 to March 2018 when Selic reached 6.5% per year, the 12-month accumulated average IPCA was close to 4% per year as it is now.

Another factor must be repeated in this cycle. Anyone who waited to rebalance their portfolio and remained in assets referenced to the CDI until the end of the period missed a great opportunity at that time and should also miss it now.

At the end of that cycle of falling interest rates, that is, when the Selic was already at 6.5% per year, the opportunities for fixed income fixed or referenced to the IPCA had already adjusted to the new reality.

Yes, the Central Bank withdrew the message committing to drops of the same magnitude for meetings following the one in May. However, this commitment has never been a market practice. It was a strategy by this management to, at this moment, better signal its intention to the market. The risk regarding the BC’s performance on interest rates has always been something well managed by the market.

At this moment, the expectation is that the Central Bank will continue reducing interest rates at least until the Selic reaches 9% per year. And that is something very likely.

There are 6 more meetings left for COPOM this year. If COPOM makes, as already promised, another 0.5% reduction and changes it to a 0.25% drop in subsequent meetings, the Selic will end the year at 9% per year.

With a basic rate of 9% per year and an IPCA of 4% per year at the end of 2024, the real rate implicit in the Selic rate will be 4.8% per year. This level of real interest is still higher than the Selic’s average real interest rate over the last 15 years, which was 3.8% per year. Therefore, even after reaching 9% per year there will still be room for further Selic cuts by the BC.

With this scenario in mind, the most recommended option is to take advantage of the opportunities of pre-fixed corporate credit bonds referenced to the long-term IPCA. The rates on these bonds reach the equivalent of 14% per year and IPCA+9% per year with terms of 7 to 15 years.

If you invest now, at the end of this year, these bonds will be yielding the equivalent of more than 150% of the CDI. However, you should not be able to invest with the same remuneration if you wait for Selic to reach 9% per year.

Therefore, take advantage now to guarantee a good return on fixed income for many years to come. This could make all the difference in the long run.

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

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