Is the BTP Valore, returning to issue from 2 to 6 October, a more advantageous option compared to the alternatives already available on the secondary market, such as BTP Italia and traditional BTP? Although the actual specifications of the new bond dedicated to families will be revealed only on September 29, some characteristics of the BTP Valore have already been announced, as they resume those of the previous issue due in
June 2027.
The five-year term of the BTP Valore, which will be issued next October, represents a year longer than its counterpart placed in June. This medium-term deadline is suitable for investors who expect to face expenses or make major investments at the end of this period. In fact, to manage risk adequately, consultants recommend aligning the duration of the security with the date on which the invested capital must return to the
saver.
To understand which BTP is the best choice, it is worth asking yourself a few questions about the desired result. Do you want maximum flexibility, inflation protection, or a higher recurring income? We will try to answer these
questions.
All BTPs have in common the same issuer, the Italian State. Therefore, the most important risk to consider is the possibility, not excluded a priori, that the country will become insolvent before the bond’s expiration date. This risk does not change if you choose a BTP Italia, a BTP Valore or any other Italian government bond. Therefore, when selecting bonds, it might be wise to look beyond Italy and look for other countries potentially with a more reliable rating
.
In addition to the common issuer, what differentiates the different BTPs are the mechanisms on which performance is calculated. In particular, the most profound differences are those that divide BTP Italia from traditional BTP and BTP Valore
.
The BTP Italia issued last March offers a minimum guaranteed coupon of 2% per year, to which is added a component that increases in proportion to the inflation rate for families of workers and employees (FOI index). If inflation increases, the bond yield adapts to this increase, ensuring that the purchasing power of the investment made is protected. If the objective is to protect the investment from possible price increases, BTP Italia is the best choice
.
However, inflation protection does not necessarily match the best performance. The BTP Italia issued in March, for example, paid the first half-yearly coupon last week, somewhat disappointing expectations: the gross return was 1.342 percent, of which 1% corresponds to the guaranteed minimum return (or half of 2% per year) and the rest of 0.342 percent corresponds to the adjustment of the FOI index, that is, the increase in the cost of living in the semester considered. The adjustment was not particularly significant because, after March, the fall in energy prices curbed inflation. If inflation had risen higher, the same thing would have happened to the BTP Italia coupon as well
.
The BTP Valore, like the traditional BTP, does not protect against the risk of inflation: the amount of the coupon is expected in advance and is not adjusted to the cost of living. Therefore, a particularly rapid decline in inflation would reward investors who had chosen a coupon that did not adjust to inflation. On the contrary, an unexpected rise in price would highlight the purchasing power protection qualities of BTP Italia
.
BTP or BTP Valore: choosing the right investment option
When it comes to choosing between BTP and BTP Valore, the traditional solution seems easier. The coupon rate is announced before it is issued and remains the same until the bond matures
.
The BTP Valore, on the other hand, does not have a fixed coupon. Instead, it increases according to a set schedule. The BTP Valore issued in June offered a coupon equal to 3.25% for the first two years and 4% for the third and fourth years. The next issue will have a different mechanism as the duration of the BTP Valore will increase from four to five years
.
Is it better to choose a fixed coupon rate or a step-up rate? Generally, with the same coupon rate and the average duration of the bond, the fixed option would be preferable. Receiving a higher coupon rate in the early years allows for a more profitable reinvestment of funds. That’s the theory, but in practice, the difference between a four-year duration and a five-year duration is not significantly substantial. In addition, the Treasury has balanced this drawback by rewarding those who chose the BTP Valore with a higher overall return. Through a combination of coupon rates and loyalty rewards, investors in BTP Valore received a return of 0.2% higher than the traditional alternative, assuming that they bought the bond during the issue and kept it until maturity. This advantage, however, disappears if the BTP Valore is sold before it expires, as the investor loses the right to receive the extra 0.5% return (the loyalty premium), which cannot be claimed even by investors who buy the security on the secondary market. In summary, for investors who do not intend to sell the security before it expires, Btp Valore offers something more
.
What can we expect from the yield of the new BTP Valore due in October 2023? Considering the current market values of 5-year BTPs (as of September 19), a premium of 20 basis points on the next issue of the BTP Valore in October could translate into a return at maturity of 4.2%, including coupon rates and the loyalty premium.
