https://youtu.be/UBKHWyM32iM

June 21, 2022.

Fixed Income Brazil

Late last year I came across a video on Tik-Tok where a guy was trying to answer the following question from one of his followers:

What is the best direct treasure?

His answer was that the investor should choose a pre-fixed bond or an IPCA+ bond depending on the perception of future inflation .

This article is a review of that question: What is the best direct treasury?

For that, let's go back in time, and see what the Direct Treasury Card offered us at the time I watched the video.

Source: Treasury Direct on December 21, 2021.

According to the video watched, the best securities for investors would be fixed-rate securities and inflation-linked securities , depending on the investor's projection. Therefore, to start our studies, we are going to choose two bonds with the closest maturities to each other. Let's select Prefixed 2031 with half-yearly interest and maturity in January 2031; and we will also choose the I PCA + 2030 with semi-annual interest (JS) and maturity in August 2030. We will allow ourselves the luxury of investing at the same time in the two securities most indicated by the video and we will see how they fared to date .

1-Title Prefixed with JS purchased on December 21, 2021:

Let's start by studying the prefix title . For this I need to find out how much the investor would have paid on the day I watched the video.

The investor would have disbursed for the security on 12/21/2021 BRL 1,012.25

The Coupon received on 01/01/2022 would be R$48 gross.

Let's now investigate, how much that same title is worth in the market today.

Unit price today (06/21/2022): BRL 905

Result: Loss.

2. IPCA+ 2030 bond with half-yearly interest:

Let's now investigate inflation-indexed bonds. First I must check how much the investor would have disbursed on December 21, 2021

Carrying out some research on the treasury website, I discovered that the price paid for the title on 12/21/2021 would be approximately R$4,074.62

The next step is a little more technical. I must check how much coupon the investor would have received on Feb 15, 2022, as the bond has semi-annual coupon payment.

So for this task I have to find out the Updated Nominal Value (NAV) of the security, which is not the same as the market price we see in the chart above.

For such a situation, I will use the IBGE website to generate our VNA, in this title that was launched on 02/10/2010.

Source: IBGE

With that, I discover that the VNA on 02/15/22 was R$4,088.68. Resulting in a Coupon received on 02/15/2022 of approximately BRL 120.85 gross.

My next task is to check the current price of the security in question.

Title Redemption Price today on 06/21/22: BRL 4,144.79

Result: In December, the investor disbursed R$4,074 to buy a security that received a coupon of R$120 in February, and today (06/21/22) it is worth R$4,144.79. An approximate total return of 4.6%.

3. Checking the accumulated inflation for the period

The next step is to check how much inflation "took" from our purchasing power in the same period considered to compare with our income.

Image with the monthly inflation of the last months. Source: G1

As a result, accumulated inflation for the period is approximately 5.5%. That is, none of the securities indicated actually covered inflation in the period.

4. What government bond actually covered inflation for this period?

Let's now evaluate the title least indicated by our expert, which was not even mentioned in the video: The Selic Treasure.

Unit price of the security paid on 12/21/2021: BRL 11,057.30. There is no receipt of any coupon in this case.

Let's now go to the last step, find out how much the title is worth today, consulting the website of the treasury direct again, we have:

Unit price today 06/21/2022: BRL 11,711.92

Result: Gross gain of 5.9%, which is enough to cover inflation for the period considered.

5. Moral of the story:

With an accumulated inflation of 5.5% for the period from December to June 2022, the only security that was able to satisfactorily control inflation was the Selic treasury with a yield of 5.9%. The titles indicated by said Tik-Toker did not bring the desired protection for the selected period.

Still, the question “ which government bond is best ” remains unanswered. This answer is dependent on countless other factors that include: permanence period, cash flow needs, reinvestment risk, inflation and interest perspectives, internal scenario; external scenario and; country's sovereign risk. What is certain is that there is no “silver bullet”, neither in variable income nor even in fixed income.

Source of bond prices in the images used in this article: Direct Treasury

To think about:

What is the possibility of a default on the Brazilian debt?