The best fixed income indicator has only lost the CDI in 3 of the last 19 years – 09/16/2023 – From Grão to Grão

When talking about fixed income, three letters stand out, CDI. Most don’t even know what the letters mean, but they feel safe with them. Despite being the indicator most followed by the market, it does not guarantee two important elements for medium and long-term investments. In this sense, another fixed income indicator meets these criteria and still beats the CDI in the medium and long term.

The anxiety about monitoring the performance of high-frequency applications is one of the biggest investment villains. It leads investors to more comfortable, but less efficient, decisions.

For example, what would you say about a fixed income investment that, between 2003 and 2022, lost the CDI in 93 of the 228 months? In other words, would you say that this fixed income that you lost from the CDI in 41% of the months would have been a good investment? What if I say that it presented a negative monthly return in 62 months, in the same period, that is, in 27% of the months? It seems like this application was never interesting, right?

In fact, the central question lies in the appropriate period to evaluate returns and withstand the anxiety of short-term fluctuations. Security does not come from the absence of oscillation, but from two criteria.

When we think about a fixed income indicator for the medium and long term, it must meet two criteria:
1 – Guarantee the restoration of purchasing power, that is, have a reference to inflation;
2 – Guarantee real interest, that is, an interest rate above inflation.

At this moment, the CDI seems very interesting, but it does not meet these criteria. We have already seen that the CDI can fall and present very low returns.

In this regard, the IMAB-5, an index that reflects the average of public bonds referenced to the IPCA with maturities of less than 5 years, meets the criteria and beats the CDI in the medium and long term.

Additionally, the fact that it is made up of securities with a shorter maturity date means it has low volatility.

However, even with low volatility, it was the fixed income indicator mentioned above for having lost the CDI in 41% of the months between 2003 and 2022.

Investors’ resistance to adopting IMAB-5 and investing in assets linked to it is due to the difficulty in enduring the anxiety of the monthly evaluation. Often even daily.

Between 2003 and 2022, IMAB-5 returned 857.2%. In the same period, the CDI yielded just 573.6%.

Therefore, IMAB-5 appreciated by the equivalent of 149.4% of the CDI. In the 19 years, only in 3 years did the IMAB-5 lose from the CDI.

I did not include the year 2023 in the sample, as it is not over yet, but I believe that IMAB-5 should also beat the CDI and Selic.

According to Anbima, the IMA-B5 yield is 5.5% + IPCA. This is the weighted average yield of government bonds with less than 5 years to maturity. Consult this spreadsheet (link) for the titles that form this index.

Based on the past, there is a high probability that this return will surpass the CDI in the next five years.

However, you will have to endure several months with returns below the CDI. To reduce this impact, there is the possibility of private bonds, as their yield is even better.

Private bank bonds such as CDBs and corporate bonds such as debentures, CRAs and CRIs have an additional premium in relation to the real interest rate of 5.5% per year. Additionally, several corporate bonds are still exempt from income tax.

Therefore, for those who prefer to hold short-term bonds, these are good choices for medium and long-term investments.

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

Speak directly to me via email.

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