It’s official: starting March 6, the new issue of the Btp Italia, the government bond issued by the Treasury indexed to Italian inflation, will be triggered. When the cost of living has risen so sharply and suddenly, the appeal of a bond that protects against rising prices may be stronger than ever. But does it yield more or less than a regular Btp of the same maturity, in this case, five years? The answer is not the easiest; here are some critical elements in deciding.
At the time of publication, the Ministry of Economy has yet to announce the minimum yield for the bond, which will be issued to small savers between March 6 and March 8. As of February 7, this is the particular figure; the “normal” Btp with a five-year maturity generates a yield of 3.58 percent. In contrast, the yield on the Btp Italia is variable by definition, as it consists of a fixed coupon, to which is added another component commensurate with inflation as measured by Istat. As a result, if inflation stays above a certain threshold, the indexed bond yields more than the fixed coupon bond, and vice versa.
For investors who participate in the primary issue and keep the bond in their portfolio until maturity (but not for those who buy the Btp Italia later), an additional yield (loyalty premium) of 0.8 percent will be recognized.
Generally, the preference for an inflation-indexed bond should be driven by expectations about future price trends. Understanding the reasons for the observed rise in inflation in 2022 is crucial to guide the decision because the price of some products, such as energy, rises and falls very rapidly (i.e., they are very volatile). If inflation were to return quickly, following a stabilization of energy prices, the Italy Btp would offer a less attractive yield. Conversely, if the price increases observed so far drive an upward spiral of costs on numerous other products as well, triggering the expectation of higher inflation, Btp Italia could protect more against this negative eventuality.
What are the best alternatives to the Btp?
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The elements for comparing Btp and Btp Italia
Before deciding whether to invest in the Btp Italia, Lorenzo Brigatti of Lixinvest told We Wealth, “the first factor to consider is the guaranteed minimum annual real rate. This new issue will be announced to the public on Friday, March 3, so without this number; it is difficult to make comparisons.”
The second factor, as mentioned earlier, lies in future inflation expectations. “If inflation is expected to rise significantly in the next five years, the indexed Btp is preferable to its non-indexed counterpart since the principal would be revalued for coupon determination every six months, based on price trends,” Brigatti said, “conversely if inflation expectations are low or stable, the regular Btp could offer a higher yield.”
According to the independent bond analyst Giacomo Alessi, current market expectations are relatively subdued. However, it is difficult for there to be “a sudden inflation meltdown” since, in addition to the more volatile components, several others adjust with a lag-for example, rents, wages, and services. The one-year inflation index predicted by the market is currently 1 percent, and “at ten years it is not even at a 2 percent.” In summary, investors expect for Italy “a rather low inflation,” said Alessi, who would avoid putting in an excessive amount of inflation-indexed bonds: “Right now, fixed rates offer a good yield, and I don’t think inflation will exceed the yield on the 10-year Btp, which is currently at 4.18 percent.”
The fact that today’s inflation is very high is not indicative of how much the Btp Italia will be able to yield: “One important thing to consider is that the current level of inflation does not automatically make the inflation-indexed Btp a better choice,” Brigatti pointed out, “this data, what you read in the newspapers, refers to the past and does not have a significant effect on the yield of the Btp Italia.”
To put it otherwise, the bet on the indexed Btp is not winning after inflation has risen but when the purchase is made before inflation increases unexpectedly. Well moved, for example, would be the investor who put a Btp Italia in their portfolio in 2021 (shrewdly, however, the Treasury did not issue a single one that year, as fears began to mount about bottlenecks caused by the post-covid reopening).
Alternatives
For those who want to have a hedge against the risk-inflation but without over-exposing themselves to the fate of the Italian state (and its high public debt), “one can then consider Etf’s that invest in bond government bonds across Europe,” Brigatti said, “or create balanced investment portfolios with an adequate percentage of equities: although they might suffer a bit in the short term, they should protect against the effects of inflation in the medium/long term (5 years and up).”
