This week, the Treasury raised 9.25 billion euros through the auction dedicated to medium-long term government bonds. Of the five securities offered, two concerned a three-year maturity. Three billion have been raised on it. In detail, there was the ninth tranche of BTp 15 February 2027 with coupon 2.95% (ISIN: IT0005580045) and the ninth tranche of BTp 1 April 2027 with coupon 1.10% (ISIN: IT0005484552). The former commanded a hammer price of 99.10 cents for an annual gross yield of 3.32%. The second was sold for 94.12 cents and a yield of 3.28%.
Very different coupons
As you can see, the two bonds delivered essentially identical returns. And it couldn’t be otherwise, having almost equal deadlines. The first is the current 3-year “benchmark”, whose debut dates back to a few months ago, while the second was launched two years ago and in market conditions completely different from those of today. The coupon indicates this. As you have noticed, at this stage the annual rate is close to 3% compared to just over 1% set then. We are talking about a period in which interest rates were still at zero. They would be raised by the European Central Bank (ECB) in the following months due to the unexpected explosion of inflation.
Finding ourselves faced with two BTp 2027 with equal yields and very different coupons, how should we behave? The answer will not be the same for everyone. One or the other option would theoretically be indifferent. In reality, this is not the case if our aim is to aim for a given level of return, collecting appropriate coupons for the entire duration of the investment.
With the February 2027 BTp our gross effective coupon would currently be 2.98%. It is given by the annual rate compared to the market price. This value is equivalent to 90% of the entire return. Instead, with the April 2027 BTp the gross effective coupon is just 1.17%, approximately 36% of the yield offered.
It means that in the first case the periodic collection of the coupons would already allow us to collect almost all of the yield, while in the second we would have to wait for the maturity to obtain two thirds of the yield. As? Thanks to the capital gain realized with the repayment of the capital at values higher than the purchase price.
Italian inflation below 1%
In a period of high inflation, the market tends to reward bonds with higher coupons, with the same maturity and yield. The reason is simple: the erosion of purchasing power occurs quickly and we need to anticipate the collection of payments as much as possible to stem it. When inflation is low, this need is felt a little less. After a two-year period to forget, theItalian inflation it fell again below 1%, among the lowest levels in the Eurozone. The perception of savers, however, is not yet of a return to price stability. The cost of living continues to be felt and this should favor bonds with higher coupons in the coming months, such as the February 2027 BTp.
BTp 2027, adequate yield and low duration
Regardless of this aspect, does it make sense to focus on a medium-short term? With the rate cut coming, thelengthening of the duration of the wallet would be healthy. We would take advantage of the rise in prices, although this has already more or less happened in the past months. Exposing yourself on too long maturities also carries the risk of tying up liquidity for a period that is not sustainable for our family budget needs. The 2027 BTPs fall within the time horizon preferred by savers, generally up to seven years. They are not a typically speculative investment, but if anything they help to maintain the portfolio return at acceptable levels. The negative aspect is that, most likely, the capital at maturity will have to be used in less profitable assets.
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