Understand if it makes sense to buy Prefixed Treasury with lower return than the Selic – 07/16/2023 – From Grain to Grain

Rates for prefixed federal public bonds on the Fazenda Direto platform are all well below the current Selic rate. In fact, the return on these bonds is similar to the return on savings. So, does it make sense to invest in them?

There are three fixed-rate securities available for investment on the site of the Direleto Treasury. Two of them do not pay interest and mature in 2026 and 2029. The third bond pays semiannual interest and matures in 2033.

The return on these titles was on Friday between 10.34% per annum and 10.71% per annum.

If we consider a 15% income tax rate on earnings, this return falls to the range between 8.78% per annum and 9.10% per annum.

The monthly return on savings is currently at 0.7% per month. This equates to an annual return of 8.7% per year. Therefore, very close to the net return on IR of the fixed-rate Treasury bond.

Therefore, fixed-rate Treasury bonds are not attractive for investors with a horizon of less than 2 years.

However, it should be remembered that the Selic rate should drop to 9% per year at the end of 2024. Additionally, it should drop to 8% at the end of 2025.

Assuming that the Selic remains stable at 8% per year from 2025 to 2029, then the Selic yield by the end of 2029 should accumulate 72.4%.

The fixed-rate government bond maturing in 2029 currently has a rate of 10.67% per annum. This cumulative return from today until the end of 2029 should result in an appreciation of 93.3%.

Therefore, the return on this fixed-rate security must be higher than the CDI and the Selic if the horizon is long-term, that is, five years or more. By 2029, their result should be 128.8% of the CDI.

However, there is a reasonable risk in acquiring these securities, as two situations may occur. Either the Selic may not fall as fast as the market expects, or inflation may rise again and the Selic not remain at 8% per year as I used in the projection.

Therefore, despite the fact that fixed-rate Treasury bonds still have some premium, I do not consider the risk-return balance of investing in these bonds attractive.

If you want to invest in prefixed securities, prefer CDBs covered by the FGC guarantee or have a well-diversified portfolio of private securities exempt from IR of good credit quality.

For this period of 2029, there are CDBs with a rate higher than 12% per annum. Also, there are prefixed CRIs with a rate close to 11% a year, exempt from IR. An income tax-free rate of 11% per year equals a gross income tax return close to 13% per year. Therefore, much higher than the public bond rate.

These higher rates on private bank and corporate bonds provide a safety margin in case inflation rises again in the future. Especially in the case of CDBs, which are guaranteed by the FGC and are therefore very safe.

In fact, with the drop in fixed rates and the sharp recent drop in the IPCA, the safest thing right now is to focus on securities linked to the IPCA. In these bonds, if inflation rises again, you are guaranteed a fixed and very positive real interest rate. The same guarantee does not exist in prefixed bonds.

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

Talk directly to me via email.

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