A few days ago, a consulting client asked me about the difference between two Treasury Direct bonds: the 2035 Fixed-Rate Treasury Bond with Semiannual Interest and the 2040 IPCA+ Treasury Bond with Semiannual Interest. An obvious difference is the nearly five-year gap between the maturity dates of these bonds. Additionally, I’ll disregard the interest rate values paid in each case. Both pay semiannual interest. For educational purposes, I will focus on the fact that one is fixed-rate and the other is linked to the IPCA.

The IPCA is the Broad Consumer Price Index, measured by IBGE (Brazilian Institute of Geography and Statistics), which is the official inflation indicator of the country.

The first bond, which is fixed-rate, has a defined rate, providing a guaranteed nominal return. The second bond has a guaranteed nominal portion and also pays the variation in inflation. In other words, for the second case, the investor is assured that their money will be adjusted in real terms.

For analytical purposes, let’s use a very simplified example:

Suppose the IPCA is at 5%, and the interest rate of the IPCA+ Treasury Bond is also 5% for a given period. We then assume that 10% interest will be paid for the period. If the fixed-rate Treasury Bond is also paying 10%, there is virtually no difference between the two investments.

Now, suppose inflation rises to 10%, those who invest in the IPCA Treasury Bond will receive 15% return, while those who invest in the fixed-rate Treasury Bond will receive only 10%. On the other hand, suppose, for example, that inflation in the period falls to 2%, then the fixed-rate Treasury Bond investor would receive 10%, and the IPCA+ Treasury Bond investor would receive 7% as remuneration for the period.

From this analysis, we can see that while one rate is fixed, the other is hybrid, consisting of a fixed part and a variable part. This way, we also realize that these investments may be more or less suitable for each case, hence the importance of seeking assistance from a specialist. You can contact me to schedule a consultation.