How to make money in the short term with crisis and uncertainty

The normal in the market is for a fixed income investment to have a better yield if the money is invested longer. But in this moment of crisis, there is a rare situation that people can take advantage of: you can earn more in the short term than in the long term. This is good for those who need the money right away.

There is an investment in the Treasury Direct with maturity in August, offering a higher yield than others maturing in the coming years. This opportunity to receive a higher rate for a shorter term investment is due to the imminent uncertainties that have caused an increase in inflation in the country, say market professionals, who draw attention to the costs and risks of this business. See what experts say about this investment tactic.

Long-term and short-term interest rates

The longer an application has until maturity, the greater the risks of changes in the economy affecting inflation and interest rates, for example. That is why it is normal in the market for an investment to offer the investor higher returns for longer terms.

But there are times when short-term interest rates match or even exceed the market’s projected long-term rates. This happens when some phenomenon of the present becomes stronger than the risks caused by uncertainties related to the future.

In the interest rate market, short maturities are more influenced by monetary policy, that is, than the market expects for inflation and for the interest rates that the Central Bank will apply. The long part of interest is more related to the government’s solvency risk, that is, to the behavior of the public debt.
Mario Kepler, partner at Portofino multi family office

Higher inflation today affects application yields

At the moment in Brazil, the market is very concerned about inflation, which has reached the highest levels in 19 years. AND to regain control over rising prices, the Central Bank began to raise interest rates more strongly this year.

the base rate Selicwhich was at 2% in March 2021, has now reached 13.25%, the highest since January 2017. According to a statement from the Central Bank, after the last meeting of the Monetary Policy Committee (Copom), interest rates are still going up. go up some more, before they park for a while and then start to fall.

For 2023, for example, the market projects inflation of 4.5% and a basic interest rate Selic of 9.75% —both below current levels, according to the Central Bank’s latest Focus Bulletin.

The president of the Central Bank, Roberto Campos Neto, said this week that the worst moment of inflation in Brazil must be over. Therefore, the market sees a lower interest rate in the future than currently practiced.

For the next few years, investors expect the Central Bank to be able to control inflation and cut the rate Selic. Therefore, investors expect interest rates to fall over time, which causes long-term interest rates to fall below short-term rates.
Nicolas Borsoi, chief economist at Nova Futura Investimentos

The rates practiced in the futures market, where financial institutions negotiate interest contracts that serve as a basis for investments and loans, point to this scenario up to a two-year horizon.

From then on, the projected interest rates are higher for longer contracts. See below fixed interest rates for some terms, according to data from Anbima, on June 24th.

prefixed rates

  • 4 months: 13.75%
  • 12 months: 13.25%
  • 21 months: 12.74%
  • 29 months: 12.61%
  • 38 months: 12.63%
  • 59 months: 12.82%

Fixed rates linked to the IPCA, according to data from Anbima.

  • 4 months: IPCA + 7.69%%
  • 12 months: IPCA + 6.08%
  • 21 months: IPCA +5.78%
  • 29 months: IPCA + 5.65%
  • 38 months: IPCA + 5.59%
  • 59 months: IPCA + 5.60%

See yields on some applications

The behavior of the interest practiced in the futures markets determines the returns on investments, such as Treasury Direct bonds.

IPCA Treasury:

  • Treasury IPCA 2022: IPCA + 12%
  • Treasury IPCA 2026: IPCA + 5.52%
  • Treasury IPCA 2035: IPCA + 5.80%
  • Treasury IPCA 2045: IPCA + 5.80%

Prefixed Treasure:

  • Prefixed Treasury 2023: 13.75%
  • Prefixed Treasury 2025: 12.62%
  • Prefixed Treasury 2029: 12.70%
  • Prefixed Treasury: 2033: 12.96%

There is an expectation that the measures being taken by the government to reduce inflation will hold back the IPCA. Thus, for inflation-linked public securities to have the same return as a floating-rate investment for the same period, the rate added to the IPCA in the short term must be higher.
Ulisses Nehmi, CEO of Sparta Fundos de Investimento

Two disadvantages of very short-term application

Yields on ultra-short-term bonds can be an opportunity for investors, but they need to consider two factors that could erode the extra gain, say market professionals.

  1. Taxes: The very short-term investment pays more Income Tax at the time of redemption because the rate on withdrawals less than six months old is 22.5%, the highest in the regressive taxation table. To compare, an application that waits for one year pays a rate of 17.5% and if the redemption is made after two years, the IR drops to 15%.
  2. cost to reapply: If the investor is not going to use the redeemed money, he will have to reapply the capital. And it may be that the rates offered on bonds available on the market in August, for example, are less advantageous than those practiced today. If you also put the extra tax that he paid and any brokerage fees, if any, into this account, the extra advantage that there was in the very short-term bond may disappear.

Very short-term investments have higher taxes and higher transaction costs compared to long-term investments. So, it’s more of a speculative profile operation than a portfolio allocation.
Mario Kepler, partner at Portofino Multi Family Office

Who is the investment worth?

Investment in very short-term securities is better suited to boost part of the portfolio, and not as a strategy for the entire portfolio, says Camila Dolle, head of Fixed Income Research at XP Investimentos.

In other words, it is an opportunity for those who separate a slice of their fixed income portfolio for the so-called tactical moves, which seek to capture specific market opportunities.

And be careful because the shorter the shot, the greater the care with the risks, because in this case there is not much time to react to large price fluctuations and other risks.
Camila Dolle