Prices are below par, here are the returns

Joseph Tempone

37 minutes ago –

June 23, 2023, 08:48

A new session will be held on Tuesday 27 June BTP auction in the medium term. With this issuance, the Ministry of Economy and Finance will raise between a minimum of 3.25 billion euros and a maximum of 4.25 billion euros. There will be two types of government bonds on offer. There is the BTPs in the short term Due March 28, 2025 at a gross annual coupon of 3.40% (ISIN: IT0005534281). The amount will be between 2 and 2.5 billion. This is the ninth tranche of this bond, which has a remaining term of 21 months.

We know that the short-term BTp period can be anywhere from 18 to 30 months. Its first release dates back to last February, when it first appeared on the sovereign market for a period of 25 months. On the secondary level, it closed yesterday at 99.40 cents, just below the price. It corresponds to a total annual return of 3.79%. Net of interest tax, it drops to 3.32%. Not bad for such a short title.

The point is that between now and the deadline it is not certain that he will be able to coverItalian inflation. This is expected to remain high in the coming months. It will drop dramatically next year. There will be no time to get less than the 3.32% average return that the stock is offering at the moment.

BTp auction, there is also an indexed bond

In the BTP auction, there will be a second security: BTp€i May 15, 2029 with a real 1.50% coupon (ISIN: IT0005543803). This bond was also priced below yesterday’s close, around 99 cents. Therefore, the real return shown was 1.67%.

Compares with approximately 3.80% offered by Treasury bonds of similar duration and fixed coupon. It follows that the difference of 2.15% is equivalent to the expected rate of inflation for the Eurozone over the next six years or so.

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In fact, the BTp€i is a Eurozone inflation-indexed bond, net of tobacco. Performance is partly different from BTp Italia. For example, file Capital increase It will happen upon expiration in one solution. Therefore, the price that the buyer will be asked to pay may be much higher than the quotation. Cumulative inflation from issue to date of purchase must be added. Specifically, BTp € i 2029 was released a few months ago, on April 26 to be exact. It follows from this that the reassessment applies only to two months.

It is clear that investing in BTp€i is equivalent to betting on inflation. If this proves to be below market expectations, the investor will earn a lower average return to maturity than he would have received at that time by buying BTP at a fixed coupon. Conversely, if inflation turns out to be higher than expected.

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