17% interest on fixed rate and real gain of almost 8% on inflation-linked ones; check out times when government bond returns exceeded current levels

SAO PAULO – The combination of increased domestic risks related mainly to politics and the debate on public accounts, with global uncertainties about the pace of growth of the large economies in the face of the delta variant in recent weeks, led to the rates paid by Brazilian publicly traded bonds to surpass the double-digit mark, surpassing 11% in the case of fixed-rate securities, and to pinch a real interest of 5%, in the case of papers with yields linked to long-term inflation.

Remuneration levels attracted the attention of investors, especially when compared to other moments of intense volatility and strong opening of rates.

In March 2020, for example, at a time when the pandemic caused the greatest damage to asset prices, rates on fixed-rate securities traded at Tesouro Direto did not reach levels close to current levels.

In the case of the Prefixed Treasury maturing in 2031, which started to be offered in February of last year, the premium reached 9.86% at its maximum during the year 2020 – a percentage well below the remuneration of 11.02% seen in the last day 18.

The Prefixed Treasury bond maturing in 2026 also reached the highest level of remuneration in the trading session on August 18, when the premium corresponded to 10.34% per annum. At the most acute moment of the pandemic for the markets, on March 23, 2020, the return of the paper reached a maximum of 9.00%.

Among those indexed to inflation, the IPCA+ Treasury bond for 2035 paid a real premium of 4.92% on August 18, the highest of the year, re-approaching the levels seen during the pandemic – on March 23, 2020, the premium of the paper reached 4.95%.

The real interest rate on the paper, which follows the price index maturing in 2055, the longest term available at the Treasury, reached 4.97% on August 18, the highest for the year so far. The paper, which started to be traded in February 2020, came to pay a return of 5.17% in March of last year.

Although rates have reached high levels compared to recent months, in longer past windows, it is possible to find periods when yields were significantly higher.

The IPCA+ 2035 Treasury itself, which began to be offered in March 2010, paid its highest historical yield, of 7.80%, in January 2016. At the time, a few months before former president Dilma Rousseff (PT) suffered the impeachment, inflation was running at 10.7% in 12 months, with a Selic rate of 14.25% per year.

In the case of fixed rate securities, the most experienced investor should remember rates that reached 17% per year in 2015, when the country had inflation of 10.67% and a Selic rate of 14.25%.

Although current returns are far from those levels of a not-so-distant past and it is necessary to monitor the evolution of risks, in Brazil and abroad, professionals who monitor the market point out that it is increasingly difficult to ignore the opportunities that are being offered in the government bond market, assets considered to be of lower risk available to investors.

“I think there is still a lot of ground to move from a 10% premium to 17%, but these are some of the highest rates we’ve had in the most recent period,” says Leticia Camargo, a CFP-certified financial planner.

Francisco Levy, investment director at Allea Wealth Management, considers the levels at which government bond rates have fluctuated as exaggerated, especially in the case of fixed rate bonds of three to five years.

No wonder, after spending the last two to three years without carrying fixed-rate securities in the portfolio, considering the remuneration offered unattractive, Levy has returned in recent weeks to having a strategic position in the shares.

Regarding inflation-linked bonds, the specialist says that investors should be more cautious with shorter-term bonds, from two to three years, as prices may experience a strong deceleration in this window as a result of the tightening monetary, and the prizes offered are not that high, he assesses. For slightly longer maturities, such as 2025, 2030 and 2035, Levy considers the levels “very attractive”.

Allocation

When it comes to allocating, the financial planner points out that, if investors prefer to buy fixed-rate securities, it is important to be able to carry them to maturity so as not to be held hostage to mark-to-market, that is, daily price fluctuations. “The ideal is to have a predefined goal to be able to carry it to the end. For example, buying a house, a car in 2024, or in 2026”, he says.

Although the double-digit rates draw attention, investors interested in the class must also take into account the high inflation expected for the coming months – the Focus report, by the Central Bank, points to the IPCA at 7.11% in 2021.

Faced with inflationary pressure, Leticia does not rule out the allocation of papers linked to inflation. Despite having risen a little less compared to fixed rate bonds, she says that “locking in” a real interest rate close to 5% can be quite interesting if the investor has a greater focus on retirement.

“If you have a bond paying IPCA + 5%, it can be a good investment for the long term, regardless of the inflation rate”, highlights the specialist.

In order to protect themselves from the most varied scenarios, in which inflation and interest rates may rise beyond what is currently expected by the market, Leticia’s suggestion is that investors should diversify terms and indexes (linked to inflation or the CDI). She explains, for example, that if inflation reaches double digits, it is important for investors to have a security like the Treasury Selic, with a basic interest rate that tends to increase in order to control the advance of prices.

Diversification, however, should not be investors’ only concern. In order not to miss out on opportunities that may arise amidst the advance of the electoral campaign and discussions around the spending ceiling, the planner recommends that investors buy the bonds little by little and, thus, make an “average price”.

Despite pressured inflation, Allea’s manager understands that the Central Bank’s firm stance to control the rise in prices can contribute to lowering agents’ expectations, without the monetary authority actually needing to raise both interest rates and market share prices. According to the expert, future interest rates price a Selic rate for the end of the year around 8%, above the 7.5% provided for in Focus.

Levy also says that, since the country has a robust international reserve, the risk of default by the government is not considered in the market today. However, what can happen, the manager points out, is a kind of “indirect default”, via inflationary corrosion.

Keeping an eye on the treasure

Although the premiums on fixed rate and inflation-linked papers are attractive (read more here), in July, investors took a more conservative posture in purchases at Tesouro Direto.

There was a change in the trend seen since December, in which securities linked to the Extended National Consumer Price Index (IPCA) stood out in investor preference, and the Treasury Selic was the most demanded paper in the month, with a share of 44.8 % on sales.

With regard to the term for issuing the bonds, investors’ preference fell on papers with intermediate maturities, with terms of five to ten years, with 50.1% of sales. Shorter government bonds (with maturities between one and five years) appear next, with a share of 35.8%. Those longer, over ten years, accounted for 14.1% of last month’s sales.

In July, sales exceeded redemptions at Tesouro Direto for the fourth consecutive month, with net funding of R$934.1 million – the highest since April 2020, when it reached R$1.6 billion.

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