Issues of new 3- and 7-year BTP bonds continue next January 12. The coupons the Treasury will offer investors will be 3.5 and 3.85 percent, respectively, with a minimum issue amount of 3 billion for both bonds. The following long-term maturity date will be January 31.
This would be business-as-usual news for the Treasury if it were not for the fact that at this particular stage of the market, the eyes of savers are increasingly interested in BTPs, complicit with yields that are much more generous than in the recent past (at least, if the effect of inflation is not taken into account).
On January 10, a new BTP with a 20-year maturity and an annual rate of 4.45 percent was successfully placed, with a gross yield at 4.529 percent: 7 billion euros were raised.
A more general thermometer of retail investors’ interest in the dear old BTP, which has always been a critical player in Italians’ portfolios, comes from searches detected by Google. Never since 2004 had the term “BTP” been so searched on the web as in November 2022, both in Italy and globally, with the level remaining, as of January 2023, historically close to the highs.
Part of this extraordinary interest stems from the recovery in yields after years of Quantitative easing and ‘driven’ compression in investor returns. At the time of publication, the yield on the 10-year BTP is at 4.1 percent: levels comparable to those of 2013 and exceeded in recent times only during the acute crisis phase of 2011-12, when a traumatic breakup of the euro area was feared. Compared to then, however, the risks to debt sustainability seem less severe, not least because the comparison between yield offered and inflation is significantly less generous to investors (in 2011, inflation was at 2.8 percent, while the average consumer price increase, in 2022, was 8.1 percent).
The expectations of those buying long-dated BTPs today are that inflation will go down from its current high levels and that, thanks to the ECB’s anti-spread shield and prudent management of Italian government spending, the yields offered by future issues will not rise further from current levels. This would allow today’s underwriters to benefit from better real (i.e., inflation-adjusted) yields and see the value of their bonds increase – with the possibility of liquidating them at a profit before their natural maturity. This effect becomes stronger the longer the security maturity is: if a reduction in yields is realized in the coming months or years, the positive change in the security price will be significantly higher as its maturity increases.
Buying at issuance or in the secondary market
Buying a BTP at issuance, for a small saver, is only possible through authorized intermediaries, usually one’s own bank. In this case, you can book by contacting your institution’s advisor. Applications must be made well in advance, and in the case of the upcoming January 12 issue, the deadline for reservations is today, January 11.
Once issued, like any other government bond, BTPs can be bought or sold on the secondary market, where they are traded among investors, again using an intermediary. Specifically, the market dedicated to these bonds is Borsa Italiana’s Mot (Mercato telematico delle Obbligazioni e dei Titoli di Stato).
What changes between buying at issuance and buying on the secondary market? If you identify a good entry point, perhaps because the government bond price has fallen and you think it will recover later, you can buy on the secondary market. The latter solution is more flexible: one can buy without marking particular dates on the calendar and at market prices.
Sometimes, however, the Italian state offers investors participating in primary issues special incentives to hold the bond until its natural maturity. This is the case with the so-called “fidelity premium,” which can be especially welcome to investors who trade little in the markets and merely collect coupons. The terms of the fidelity premium can vary; lately, it has been around an additional 1 percent over the initially invested principal. Providing the premium is, for example, the BTP Italia indexed to Italian inflation.
Regarding transaction costs, buying at issuance is cheaper because banks cannot charge customers commissions (the state provides a low fee for intermediaries in the range of 0.1 percent). On the other hand, commissions for selling early or buying after issuance are those agreed upon with one’s bank.
