Letra Financeira do Tesouro Nacional: An Overview

The Letra Financeira do Tesouro Nacional (LFT), often translated as Treasury Financial Bill, is a Brazilian government security designed to offer investors a hedge against inflation. It’s a debt instrument issued by the National Treasury (Tesouro Nacional) and is primarily characterized by its post-fixed return linked to the SELIC rate, the Brazilian Central Bank’s benchmark interest rate.

Key Features and Characteristics

Several defining characteristics make the LFT attractive to certain types of investors:

• Post-fixed Return: The LFT’s yield is directly tied to the SELIC rate. This means that as the SELIC rate changes, so does the return on the LFT. Consequently, it provides a relatively stable and predictable income stream, particularly during periods of inflationary pressure.
• Low Credit Risk: As a sovereign debt instrument, the LFT is considered to have low credit risk. The Brazilian government guarantees the repayment of the principal and interest, making it a comparatively safe investment option, especially when compared to corporate bonds or other higher-risk investments.
• Liquidity: LFTs are generally considered highly liquid. They can be easily bought and sold on the secondary market, allowing investors to access their funds relatively quickly if needed. The Tesouro Direto platform, the online platform for purchasing Brazilian government securities, further facilitates the trading of LFTs.
• Accessibility: The Tesouro Direto program makes LFTs accessible to individual investors, allowing them to invest directly in government securities without needing large capital outlays.

How it Works

When the Brazilian government issues LFTs, it essentially borrows money from investors. In return, the government promises to repay the principal amount at maturity, plus interest that fluctuates according to the SELIC rate. The exact calculation of the interest earned on the LFT is a percentage of the average SELIC rate observed during the holding period.

Investment Considerations

While LFTs offer advantages such as inflation protection and low credit risk, there are also considerations to keep in mind:

• SELIC Rate Fluctuations: While the link to the SELIC rate provides inflation protection, it also means that returns can vary. If the SELIC rate decreases, the yield on the LFT will also decrease.
• Taxation: Investments in LFTs are subject to income tax, which is levied progressively based on the holding period. The longer the investment is held, the lower the tax rate.
• Fees: While the Tesouro Direto platform has reduced fees significantly, there are still potential fees associated with brokerage accounts or custodial services.

Who Invests in LFTs?

LFTs are popular among a variety of investors, including:

• Conservative Investors: Individuals and institutions seeking low-risk investments with a predictable income stream.
• Inflation-Conscious Investors: Those who want to protect their capital from the erosive effects of inflation.
• Retirees: Investors looking for a relatively safe and stable source of income during retirement.

Conclusion

The Letra Financeira do Tesouro Nacional is a valuable tool in the Brazilian investment landscape, offering a low-risk, inflation-protected investment option linked to the SELIC rate. Its accessibility through the Tesouro Direto program makes it a viable choice for individual investors seeking to diversify their portfolios and hedge against inflation. However, investors should carefully consider the potential fluctuations in the SELIC rate and the associated tax implications before investing in LFTs.