undefined | Better HN

story

0 pointscesarb9y ago0 comments

I live in Brazil, so if the government defaults, every other investment I could have made here would also crash, and the local economy with them. It's not called the "risk-free" interest rate for nothing: it's the lowest risk investment one can get within Brazil. Corporate bonds, for instance, will have a higher return, due to their higher risk.

As for inflation, when it increases the SELIC/CDI rates tend to rise with it too. And if you're afraid of that (it hasn't been long since we had a hyperinflation, so a lot of people still are), another government bond (NTN-B) has a return of inflation (measured by the IPCA index) plus a pre-fixed component (currently around 6%). Due to its pre-fixed component, it has some interest rate risk (if the interest rate rises, its present value drops, and vice-versa), but that's not a problem if you intend to keep it to term.

And, actually, the high interest rate is set by the government, as a way to control the inflation, so it's not as linked to the risk of default as one might think. The government could decide to lower the interest rate (and it has: a few years ago, it was set lower, but that led to the currently higher inflation, so the government increased it again to contain the inflation).

0 comments

DangerousPie9y ago

> I live in Brazil, so if the government defaults, every other investment I could have made here would also crash, and the local economy with them.

Wouldn't that be a good reason to invest some money abroad?

> And, actually, the high interest rate is set by the government, as a way to control the inflation

But surely that's the interest rate that their central bank charges to the banks (which influences the interest rates banks pay/charge for savings/loans with them), not the interest rate that they are paying on their own government bonds? I'm not an expert, but I'm pretty sure those are two very different things.

cesarbOP9y ago

> Wouldn't that be a good reason to invest some money abroad?

Yes, and I intend to do that someday. It's not trivial to do, however, while investing in the boring funds I mentioned is extremely easy for anyone with a bank account, and investing in government bonds is as easy as investing in stock. In particular, for both the funds and government bonds the tax is paid automatically, while if you invest abroad, you have to do the calculations yourself, and from what I've read they are not as simple. Not to mention the extra cost and risk of opening an account outside your country; for instance, the Brazilian customer protection laws won't apply to an account outside the country, for obvious reasons. All in all, it's a lot more research to do, with the extra risk of investing outside your home jurisdiction, for a much smaller return, and the only benefit being reducing your exposition to your own government - one I'll be always exposed to, since I live here (it could easily impose taxes on capital held abroad, for instance).

> But surely that's the interest rate that their central bank charges to the banks (which influences the interest rates banks pay/charge for savings/loans with them), not the interest rate that they are paying on their own government bonds? I'm not an expert, but I'm pretty sure those are two very different things.

It's complicated, but basically the government sets the SELIC rate target, and buys/sells government bonds so the SELIC rate moves towards that target. The SELIC rate itself is the interest rate banks pay each other for a one-day loan with government bonds as the guarantee. Finally, one of the government bonds (the LFT) pays the principal ajusted by the SELIC rate at its term. There is also the pre-fixed government bonds (the LTN), which pays a fixed value but is bought for less, the inflation-indexed NTN-B, which I already mentioned, and a few others.

As for why increasing the interest rate helps control the inflation, that's one thing I still don't quite understand. I just know that the government does increase the interest rate when the inflation gets above the target.

soneca9y ago

They are separate things, but one type of bond is indexed by the interest rate (another is indexed by inflation and a third type is completely preindexed on a fix rate).

j / k navigate · click thread line to collapse