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BTP Italia... the world behind the initials!

22 June 2022

BTP stands for Buono del Tesoro Poliennale in Italian, which means 'multi-year treasury bond'. BTPs are a set of medium- to long-term Government Securities with a time horizon of up to 50 years! Because of this extended time horizon, and the range of BTPs on offer (see below), they tend to be preferred by small investors. They are also the most widespread Government Security: out of approximately 2,200 billion in circulation, around 1,600 billion are BTPs.

Like all other government securities, BTPs are bonds issued by the Italian Treasury which can be purchased, either on the market or through an initial public offering (IPO), by private individuals, companies or institutional investors (such as banks, insurance companies or pension fund managers). BTP holders are then entitled to receive: 1) repayment of the invested amount when the securities mature (and this may be index-linked to inflation), and 2) a series of smaller payments ('coupons') as interest on the amount they invested.

Who were the 'BOT-people', and can we still talk about BOT-people today?

'BOT-people' is an expression that was coined towards the end of the 1970s for a class of Italian savers who had a distinct preference for the government securities issued at that time, called Buoni Ordinari del Tesoro (BOTs). Compared with other investment instruments, BOTs were short- or even very short-term bonds, and could guarantee returns that were more in line with the market, at a time of particularly high inflation and interest rates. In the early 1980s, savers started replacing BOTs with increasingly high proportions of longer-term bonds in their portfolios (such as BTPs). In the Annual Report for 1982, the Governor of the Bank of Italy stated that 'The borrowing requirement [of the public sector] in 1982 was mainly covered through net issues of medium and long-term securities (23,680 billion lire as against 5,820 billion in 1981) and Treasury bills (28,840 billion lire),' and that 'the average residual maturity of BOTs increased from 3.5 to 4.1 months'. In the early 1980s, medium-term bonds were balancing out short-term bonds. The term BOT-people has survived and is still used in financial journalism as a nickname for especially cautious savers who, on principle, prefer government securities (whatever their maturity term) to other forms of investment (such as shares and corporate bonds). So, the more appropriate expression today would be... BTP-people!

Let's take a look at the different types of BTP that are in circulation.

The most widespread type of BTP is a simple, fixed-rate bond, which yields a fixed annual coupon (at a fixed percentage of the nominal value) paid in instalments every six months., The holder is then repaid the nominal value of the bond at maturity.

When interest rates rise, the value of our bonds decreases! Why?

Let us imagine that Mario has purchased a fixed-rate BTP for €1,000, with a 2 per cent yield. This means he's going to get €20 a year in the form of interest, known as the 'coupon'). Let's then imagine that the following year there is an increase in market rates, so the Treasury starts issuing new BTPs with a 3 per cent yield, and that Mario's neighbour Luigi now decides to purchase BTPs under the new conditions. So Luigi goes to his own bank and finds out that his €1,000 investment will yield a return of... €30 a year! At this point, if Mario decided to sell the BTP he bought the previous year, he would be offering a bond that yields a return of €20 a year at a time when the new bonds available on the market yield a return of €30 (bearing in mind the amount invested is still €1,000, in our example, but the interest rate is now higher). Mario's €1,000-euro bond won't be very attractive for Luigi, as it only yields €20 a year… unless Mario sells it to him at a discount! Thus, when interest rates rise, the bonds we already own become 'less appealing' than they were when we bought them, and their market value goes down (other buyers will only accept buying them at a lower price).

Alongside traditional BTPs, which can have different term lengths (the maturity term), the Treasury has issued new types of multi-year bonds over the years, whose characteristics, strengths and drawbacks are listed below:

  1. The euro-area inflation-indexed BTP (BTP€i) pays coupons in variable amounts that are adjusted to euro-area inflation (click here for more information). This type of bond will protect an investor's savings from price rises, as the amount redeemed at maturity is the nominal value adjusted for inflation. The BTP Italia has similar characteristics, but its yield is linked to Italian inflation instead of euro-area inflation. A new type of BTP Italia has been recently issued, which offers extra returns to investors who don't sell their bonds until maturity (this is the 'double bonus payment', with one bonus paid during the bond's life and the second one only paid to investors who hold their bond until the final deadline). The coupons on bonds like the BTP€i and BTP Italia are paid out every six months, and their value increases as the value of the principal increases, in each semester, because of inflation.
  2. The BTP Green is designed to fund environmentally-friendly public spending, so we may see it as an instrument of sustainable finance! The first BTP Green was issued by the Italian Treasury on 3 March 2022, and its maturity date is 30 April, 2045.
  3. The BTP Futura yields returns that increase alongside Italian GDP. As for the BTP Italia, investors who hold it until maturity get extra returns in the form of a 'loyalty bonus', and as for the BTP Green, it is intended to fund specific Italian development initiatives (for more information, click here).

The market value of inflation-linked bonds (i.e. indexed bonds), such as the BTP€i and BTP Italia, is not affected by interest rate adjustments (which in turn are due to inflation rate changes), because the coupons and the principal repaid also vary with inflation. However, the price of indexed bonds can still be affected by fluctuations in the real interest rate (which is the nominal rate minus inflation). For Italian indexed bonds, one element that can affect the real interest rate is the spread against German bonds (that is, the higher return required by the market for buying Italian bonds, compared with German bonds). Therefore, the value of indexed bonds may also change, albeit to a lesser degree than for non-indexed BTPs with the same time horizon.

All BTPs are instruments that suit investors who can plan over a fairly long time horizon (because they don't have any large impending expenses, or have enough extra savings to cover them), or who plan to purchase and then resell them at a profit. Before they mature, BTPs can easily be resold on the regulated market (the electronic bond market, MOT), where there are always large numbers of buyers and sellers trading BTPs. Even so, we still need to be careful, because the price at which we will be able to resell these bonds depends on their future returns, which in turn depend on factors that are very hard to predict, such as inflation rate risk, the level of real interest rates (nominal rates minus inflation), and the risk of insolvency on the part of the Italian Government.

Finally, there is another aspect worth considering. The tax on BTP yields and other Government securities is only 12 per cent, compared with 26 per cent on other bonds and financial assets, which means that, if 'gross yield' is the same, the 'net return' on BTPs is taxed less and is therefore much more appealing.

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