Fixed income: why brokers are recommending short-maturity bonds

Even with generous interest rates on public and private fixed-income bonds, it is not without reservations that analysts and managers have recommended taking advantage of some of them. Many experts have suggested resisting the temptation of bonds with longer maturities, over five years, even if they generally pay more.

For most of the cases, the indication is to stick to short-term papers, of a maximum of three years, due to the uncertainties of what may happen to Brazilian politics, economy, inflation and interest rates during this period.

The rule is especially valid for fixed-rate securities, which “lock in” the remuneration at a fixed rate that will not change until the day of redemption. If interest ends up being higher than the contracted rate, the investor will earn less than he could have earned if he bought that security later on, or he may even lose money, due to the so-called “mark-to-market” (see below how it works).

Today it is already possible to find several fixed rate rates paying more than 11% or 12% per year, high remuneration compared to what was seen in the last four years, when the Selic, the country’s basic interest, had plunged into a consistent downward trajectory until reach the low of 2% last year.

Currently, it, which serves as a floor for fixed income payments, is at 10.75%, and the projections are that it will reach close to 12% in the coming months.

“Pre-fixed is good if interest rates fall later, but if the rate doesn’t fall and has to go up more, it’s bad”, says partner and fixed income analyst at Nord Research Marília Fontes.

“We don’t know how far the Selic can go and, therefore, now is not the time to lock in interest rates.”

Among these uncertainties, there are doubts about the ability to control inflation in the short term, and also how far interest rates can rise in the United States, a country that, like Brazil and the rest of the world, is also having to fight a rise in strong and persistent prices.

Added to this are changes to the country’s main fiscal rules, which should control government spending levels, and the polarized election year ahead, which leaves open what the new government and new economic policies will be from 2023

All these factors have a direct influence on the country’s interest rates and, therefore, experts have preferred caution to certainty.

“Today, the market consensus sees the Selic falling to 8% at the end of next year, but that may not happen”, says Sérgio Evangelista, fund manager at Western Asset, remembering the risks, including global ones, that inflation will continue high.

“The Central Bank may have to keep interest rates high for a much longer period of time than is being imagined, and that is the big risk on the table today.”

The recommendation of specialists has been to buy short bonds, especially fixed rate bonds, with maturities between one and three years, so that, when the moment of redemption arrives, you can make new reinvestments in the midst of an already clearer scenario.

The rule applies to both Treasury Direct and bank securities, such as CDBs, LCAs and LCIs.

Rodrigo Caetano, investment specialist at Toro Investimentos, adds that, although fixed-rate bonds are in fact the ones that suffer the most in uncertain scenarios, the rule applies to other categories of fixed income as well.

“The ideal is to buy shorter floating rate bonds as well”, he says. “If you buy a paper with 117% of the CDI today with maturity in five years, its profitability will fall as the Selic falls as well.”

For the long term, protection against inflation

The exception is bonds whose remuneration is linked to inflation, such as the IPCA+ Treasury, in the Direct Treasury.

These bonds pay accrued inflation to maturity (floating tranche), plus a fixed annual interest rate (fixed tranche), which is also at hefty levels today. This hybrid format gives investors double protection.

“These bonds guarantee the real gain [acima da inflação] and they are ideal for long term, “according to Caetano.

“This conversation [de comprar títulos curtos] It is worth it for investors who have short- and medium-term goals, and who see an opportunity now”, says Evangelista, from Western, mentioning the good offers of fixed-rate bonds offering remuneration currently of 11% or 12% per year.

“The investor who has a longer-term vision, who is planning for retirement and who has a very low probability of needing that money before, can, yes, take advantage of longer bonds, and then the ideal is to have a part linked to inflation”, adds the manager.

Risk of losing money

The great risk of fixed-rate securities lies in what is called “Mark-to-Market”: the interest and prices of these securities, in practice, vary daily, almost like stocks, according to the greater or lesser demand for them by large national and foreign investors.

Investors who hold their securities to maturity will always receive exactly the remuneration they contracted for. Those, however, who need to make an early redemption will have to accept the day’s price paid for that paper.

This price can be both higher and lower than the amount originally applied – which means that, yes, the investor can even leave with less money than he entered.

Losses occur when market interest is higher than the interest that the investor initially contracted on his security.

That rises and falls in interest rates and prices of government securities that was particularly volatile and unpredictable last year here, which greatly increased the risks of investor loss that want or need to redeem your bond before maturity.

Fixed-rates are the ones that suffer the most from these fluctuations – and the longer the term, the bigger the price roller coaster and the greater the uncertainty, as the longer the investment horizon, the less clarity there is than can happen to interest rates and the country’s economy throughout the period.

In Tesouro Direto, the exception to this volatility is the Treasury Selic, which is the only floating-rate security option that can be redeemed at any time without losses.