There is time until Wednesday, July 12, to conclude the reservation for the purchase of the new, medium-long-term BTP bonds issued in July
A new 3-year bond and new tranches of the 7-, 15- and 30-year bonds (with residual maturity of 26 years) are planned, with expected coupons ranging from 3.25% to 3.85%
There is time until Wednesday, July 12, to make the reservation for the purchase of the new, medium-long-term BTP bonds issued in July. The Ministry for the Economy has indicated that it will offer investors four denominations with the following maturities: new 3-year issue and new tranches of the 7-, 15- and 30-year bonds (with residual maturity of 26 years) are planned, with expected coupons ranging from 3.25% to 3.85.%. Overall, up to 10 billion euros will be issued through the marginal auction placement mechanism, which involves the discretionary determination of the issue price and quantity, within the aforementioned issuance levels. In other words, there will be no guarantee of the ability to purchase the entire amount requested during the reservation phase.
The BTP valore, which raised €18 billion in early June, offered over the four-year term, a gross yield of 3.75% (counting also the loyalty premium provided for those who hold the bond from issuance to maturity). How do the new issues compare to the popular bond reserved for households? The coupon offered is even more substantial for the three-year BTP with a value of (ISIN to be assigned): 3.85%.
BTP, is it time to go back to long-maturity bonds?
When it comes to choosing the maturity of the bond, the investor intending to hold the government bond for its full term should consider his own time horizon, taking into account when the amount is expected to be spent or become available again.
However, a more opportunistic management of the bond might suggest different tactics, including the early sale of the bond if it reaches a higher price than the purchase price. In this logic, the hypothesis of a recession, which could induce a reversal of the ECB’s monetary policy, might lean toward longer maturities. On the other hand, Italy’s specific vulnerabilities could limit the compression of BTP yields in this recessionary scenario, assuming the contrary is not observed, as Goldman Sachs’ analyst team argued a few weeks ago.
If a recession is on its way, which maturities are worth betting on? “The answer depends instead on what kind of recession and future scenario is expected,” said Consultique Scf analyst Rocco Probo, “if a widespread recession is expected alongside a rapid intervention by the ECB to support the economy, including a halt to the rate hike process, then long positioning on government bonds can be a winning choice.” Unfortunately, one cannot be so sure that all these conditions will occur. “If on the other hand, the recession, turns out to be focused on the Italian economy with phenomena such as widening credit spreads and a milder intervention by the ECB justified, for instance, by an inflation in the euro area that is still not under control,” Probo said, “then the effects would be contrary with significant negative impacts on Italian government bond prices, including the long-term maturities.”
In the face of this uncertainty, on which “political” variables such as the possible use of the anti-spread shield by the ECB to support Italian government bonds (BTPs), Consultique has decided to maintain a more cautious approach: “Our positioning on bonds continues to be prudential in terms of duration, avoiding positions in excessively long maturities, and diversified in terms of issuer, going beyond the Italian government bond, to keep its overall exposure monitored”.
The breakdown of the four issuances
- The newly emitted three-year BTP carries a coupon rate of 3.85% for a maximum issuance of 4.5 billion euros. The maturity date is set for September 15, 2026
- The 7-year BTP, which is the seventh tranche of the bond issued on April 17, 2023, (ISIN IT0005542797), carries a 3,7% coupon with maturity on 06/15/2023. Up to 3 billion euros will be issued
- The 15-year BTP, which is the eighth tranche of the bond issued on March 1, 2022 (ISIN IT0005496770), offers a coupon rate of 3.25% with maturity on March 1, 2038. Up to 1.25 billion euros will be issued for this bond.
- The 30-year bond, with a remaining life of 26 years, is the twelfth tranche of the bond issued on September 1, 2018, with maturity on September 1, 2049: it offers a coupon rate of 3.85% and a maximum amount issued of 1.25 billion euros.
It’s worth noting, that despite the long duration of the last bond, its coupon rate is equivalent to that of the 3-year bond. This is possible because, being the subsequent issuance of a bond launched in 2018, the coupon rate reflects the market conditions at that time. However, it should be kept in mind that the overall yield doesn’t solely coincide with the coupon rate alone.
