This graph illustrates where you should invest to benefit from the fall in the Selic – 10/31/2023 – From Grão to Grão

This Wednesday (November 1), the Central Bank’s Monetary Policy Committee (COPOM) is expected to reduce the Selic rate again by 0.5%. With this reduction, the CDI will return from Thursday the equivalent of 12.15% per year. It’s still an excellent return, but the downward trend should continue and other fixed income investments should benefit more in the future.

Although every investor knows that one should not look at the return in the recent past to decide where to invest, we were unable to resist and made this mistake recursively.

In fact, looking at the past is important to recognize some patterns. But, one must look at a longer period.

By doing this work of looking at a longer past period to look for patterns, it is possible to find a simple pattern in fixed income.

When the Selic falls, the investment at IPCA+6% per year yields more than the CDI.

This pattern is very clear in the figure below.

In this figure, two graphs of accumulated return in 12 months since 2008 are presented. I emphasize that each point in the graph represents the return that an investor obtained if they had invested 12 months ago.

On the blue line (with scale on the left) there is the return on an investment with a return of IPCA+6% per year presented as a percentage of the CDI.

Thus, when the return of IPCA+6% per year was equal to the profitability of the CDI in the last 12 months, the graph will show the point at 100% of the CDI.

The orange line on the graph shows the CDI return on an inverted scale (on the right). I emphasize that the scale is inverted. Therefore, when the CDI falls, the graph shows itself rising and vice versa.

Note that every time the Selic fell, the return on an asset whose profitability is IPCA + 6% appreciated more than the CDI.

The return of this asset at IPCA+6% as a percentage of the CDI has already inflected upwards, as shown in the graph on the right. Therefore, whoever invests now will probably earn from the CDI in the next 12 months.

Be careful when expecting to see that the accumulated return over the last 12 months is already above the CDI, or you could lose out on the rates that exist today.

Therefore, if you want to benefit from the CDI going forward and still protect yourself from the risk of inflation, take advantage of the rates above IPCA+6% per year that you currently find in CDBs with a 5-year term.

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

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