With the Selic benchmark interest rate elevated, demand for these tax-exempt instruments—previously concentrated in private credit funds—has surged throughout 2024. According to data compiled by B3 at Valor’s request, the combined outstanding volume of LCIs and LCAs has reached R$1 trillion.

In a statement, the Central Bank said the decision reflects the importance of these instruments for financing the real estate and agribusiness sectors. Until February 2024, the minimum maturity for LCIs was three months. That month, the CMN extended it to 12 months as part of broader changes to the rules governing tax-incentivized securities. The term for LCAs, which have a similar risk-return profile to LCIs, was increased from three to nine months. In August, following criticism, the CMN reduced the LCI term to nine months to correct the asymmetry. At the time, the Brazilian Association of Real Estate Credit and Savings Entities (Abecip) called the move positive but said a return to the three-month term would be ideal.

Issuance volumes of LCIs and LCAs initially dropped after the changes—from R$30.7 billion in January, near historic highs, to between R$11 billion and R$14 billion by September. LCAs, in particular, plummeted from R$45 billion to a range of R$21 billion to R$24 billion. By December, issuances rebounded to R$26.5 billion in LCIs and R$39.6 billion in LCAs, closing the year with an impressive R$392.6 billion and R$517.2 billion in total outstanding, respectively. This upward trend has continued in 2024, with monthly volumes hovering around R$25 billion for LCIs and R$31 billion for LCAs. As of the end of April, outstanding balances stood at R$560.4 billion in LCAs and R$440 billion in LCIs.

Marilia Fontes, founding partner at Nord Investimentos, said the market has adapted to the longer terms of these income tax-exempt instruments for individuals. As a result, demand resumed even at the nine-month threshold. “Default rates haven’t risen significantly, so banks continue lending to these sectors, which sustains issuance,” she explained.

She also pointed to the taxation of closed-end exclusive funds as a factor driving investors toward tax-exempt securities like incentivized debentures. Additionally, there has been a marked shift from equity and multimarket funds. “That’s why we’re seeing risk premiums narrow,” Ms. Fontes said. In 2024, average returns stood at 95% of the CDI, but have since fallen to 85%-87% of the CDI.

“The restriction last year was a step in the right direction, but it wasn’t sufficient in an environment of uncertainty and high interest rates,” said Mr. Jean-Pierre Cote Gil, credit portfolio manager at Vinland Capital.