This international fixed income application can triple the invested capital – 05/20/2023 – From Grain to Grain

Less than 24 months ago, fixed income investors around the world were living with extremely low interest rates. The rise in interest rates over the last year, combined with the increase in spreads of private credit brought investment opportunities for these investors. To take advantage of this opportunity abroad, avoid exchange rate volatility and have a lower income tax rate, brokers launched a product with attractive returns in excess of 17% per year.

The investment opportunity in corporate fixed income securities does not only exist abroad. I have been warning in recent months that Brazilian private credit securities exempt from IR also have very interesting rates of return.

Yes, private credit bonds have a higher risk than CDBs that are guaranteed by the FGC. For this reason, corporate fixed income provides higher yields.

Taking advantage of these higher interest rates around the world, brokerages are bundling foreign bonds into structured operations that provide hedging against currency fluctuations.

Thus, the investor can invest amounts as low as R$ 5 thousand in products that provide yields that exceed 17% per year in Reais.

A prefixed investment with a rate of 17% per annum can triple the invested capital in seven years. However, there are no Brazilian corporate bonds that have a return and good credit quality.

The highest return on this structured operation is explained by the following reason. When the security is acquired abroad and exchange protection is carried out, yields rise. This happens because the hedge or currency protection adds to the return on the international bond the interest rate differential between Brazil and the US.

In this way, in addition to not suffering from exchange rate volatility, the investor is exposed to national fixed income taxation and with a higher return. I remind you that the IR rate on international investments should be increased from next year, according to Provisional Measure 1171/23.

Thus, the main advantages of these structured international fixed income operations are:
1 – Possibility of international diversification with low capital;
2 – Absence of volatility due to exchange variation;
3 – Receipt of semi-annual interest;
4 – Brazilian fixed income income tax rate;
5 – Attractive expected returns.

Despite the attractiveness, it is important to remember the risks.

As I mentioned, private credit investments are not guaranteed by the FGC. Therefore, they are at greater risk.

To reduce this risk, the first strategy is to select good quality company bonds. Additionally, it is also important not to concentrate, that is, to allocate only a small fraction of the portfolio to each issuer.

As this international investment product is distributed in the form of structured operations, it does not have the same liquidity as fixed income securities. When investing in assets with low liquidity, the investor should apply only that resource that can be held until maturity.

Brazilian active fixed income fund managers also carry out operations similar to the one mentioned above. They are always comparing the yield on bonds of Brazilian companies in the local and international markets. When they realize that acquiring the security abroad together with exchange protection provides a greater return than the same security in Brazil, they opt for the most advantageous alternative.

Thus, through these structured international fixed income operations, small investors can also benefit from opportunities similar to those employed by large managers and with low initial investment values.

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

Talk directly to me via email.

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