The ones with the shortest maturity are with lesser losses and the longer ones with bigger losses. This means that the investor who bought any of these securities on the first day of the year and wants to sell now would incur this loss.
Why is this happening?
The rates offees market prices are rising along the entire interest curve. With the beginning of the Selic, the bonds had their rates revised upwards. In addition, with all the fiscal worsening during the pandemic, coupled with pressures for new aid programs and increased spending on parliamentary amendments in the 2021 budget, the market also increased the risk premium on long-term interest.
In other words, imagine that Brazil became your relative who spends more than he earns, keeps borrowing more and more money, but never makes an important adjustment to his expenses.
It is easy to understand that when fiscal risk goes up, investors charge a higher rate to lend to that country. It works the same way it does in our personal lives.
When these market rates go up, government bonds are repriced so that the investor who buys those bonds, from now on, gets that higher rate. In other words, for the same security that will be worth R $ 1,000 at maturity, its price today must be lower so that it pays more from now on.
For example, a security that is worth R $ 1,000 after 5 years, has to cost R $ 783.52 today so that the return in those 5 years is 5% per year.
If the market rates for that security rise to 10% a year, the next day that security has to be worth R $ 620.92, to adjust the new return.
This repricing of the return on the security means that the investor who wishes to sell the security purchased before maturity receives only R $ 620.92 for him, at a loss.
If the holder of the title does not want to sell, he will continue to have the option of receiving the same R $ 1,000 after 5 years. But if you need to sell, you will have to incur a loss.
That is, in times of high market interest rates, as is the current time, fixed rate and IPCA + bonds tend to suffer negative market markings.
Read too:The end of low interest rates in the world. Is your wallet ready?
On the other hand, in times of falling market interest rates, such as 2016 through 2019, we have the opposite effect. The drop in rates causes a positive mark to market for the holder of that security. In this way, it is possible to have returns for a specific year that are much higher than the rate initially agreed with Tesouro Direto, if there is an early sale.
In 2016, for example, the IPCA + 2035 yielded an incredible 51%, due to the drop in rates. It looks like a stock exchange return, doesn’t it?
Knowing how to “play” with these upward or downward trends in market rates can bring very aggressive returns with fixed income.
Now the investor has to think about whether these rates will continue to rise or not. Although this question is very difficult to answer, I will give my humble opinion here.
Unlike times when rates rise due to unfounded, political or passenger risks, this time we have an economic foundation supporting the rise. This foundation includes two pillars: (1) increased interest in Brazil due to fiscal risk and increased inflation; and (2) increase in world interest rates.
Regarding Brazilian interest rates, we had a significant increase in public debt, reaching approximately 90% of gross debt. In addition, the worsening exchange rate pressured our inflation by anticipating and increasing the Selic upward cycle. This negative fiscal scenario will not improve until we think of a reform that can significantly reduce our deficit. For now, I don’t see anything on the horizon in this regard. Quite the opposite! I see pressures for further spending increases, as happened with the approval of the 2021 budget. In addition, we are approaching the 2022 elections, making it difficult to imagine the approval of unpopular reforms.
Regarding world interest rates, we are seeing an increase in interest rates on longer maturities worldwide – in the USA, even in emerging countries. This increase is linked to the strong economic recovery underway with the infinite fiscal stimulus promoted by the USA. As American interest rates are very close to the historic low, I see very little room for them to fall. In fact, the opposite! With this foundation of excess stimuli, I can only see room for them to rise well.
With all this bad fundamentals, it is worth the investor to think twice before entering these securities. Entering at the right time greatly helps your portfolio return, in case you need to sell your bonds in advance.
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