In recent months we have seen that inflation in the country has been decreasing, which is largely due to the fact that the TPM has remained contractionary for several quarters. While in 2022 inflation ended the year at 12.8%, it is currently at 7.6% and on a downward trend. With this, it is already possible to perceive that the Central Bank is going to lower the TPM after it has remained at 11.25% since the last increase in October last year. In fact, in the latest Economic Expectations Survey, the results indicate that there could be a cut of 75 basis points at the next meeting.

The reduction of the TPM, and more normalized inflation expectations, generate an economy that will begin to present lower rates in the short part of the curve, This would imply that returns on traditional shorter-term fixed income would offer lower yields in the future, impacting investors who remain in this type of assets. In this situation, it will be essential to look for alternatives that allow higher returns.

This makes private debt an attractive option for investors in this low interest rate environment.. Due to its characteristics, private debt tends to offer higher yields than traditional fixed income. Factors such as the absence of a secondary market, which implies less liquidity, and the higher credit risk associated with private companies, generate compensation for investors in the form of higher interest rates. Even so, these risks can be well managed with diversification, insurance policies, and good assets as collateral, among other measures.

Interest rates on private debt instruments, which have maturities greater than one year, are usually linked to the Maximum Conventional Rate (MCR), which are more related to long-term rates than short-term rates. Because of this, a reduction in the MPR will have a more moderate impact on this type of private debt assets, compared to shorter term debt.

As can be seen in the graph, the TPM is currently at its highest level in recent years, while UF MCRs, which are defined by law for terms longer than 1 year, have not risen in the same proportion, due to the fact that the main driver of the increase in longer rates has been local political and economic uncertainty, rather than monetary policy.This is due to the fact that the main determinant of the increase in longer rates has been local political and economic uncertainty, and not monetary policy.. However, as cuts in the TPM are observed, higher returns should be sought in other types of assets, in which private debt could stand out.

The absence of a secondary market for private debt means that investors do not face the volatility associated with changes in interest rates. As a result, investors can obtain a more stable return on their investments compared to traditional fixed debt.

In a lower rate environment, the search for investment opportunities that allow higher returns becomes essential. Lrivate debt stands out as an attractive option for investors to include in their investment portfolios, as it offers higher interest rates than traditional fixed income due to factors such as lower liquidity and higher credit risk. In this scenario, considering private debt as part of a long-term investment strategy may be a prudent decision for those seeking stable and higher returns in a low interest rate environment.

Vincent Dourthé

Alternative Assets Analyst Fynsa AGF