This week the Treasury raised 5 billion euros with the issuance of one short-term BTp and two BTp linked to inflation European Union, one of which expires on 15 May 2036 (ISIN: IT0005588881). This stock attracted orders of 1.76 billion against a bid of 1.25 billion. It was priced at 99.39 cents, equal to a real gross yield to maturity of 1.87%, net of Eurostat’s Hicp ex tobacco index. The indexation coefficient was indicated at 0.99995.
Price linked to inflation expectations
The Treasury bond with fixed coupon offered a yield in the 3.95% area at the same time.
This means there is a gap of more than 2% with inflation-linked BTps and similar residual duration. The market is apparently pricing in an average inflation rate in the Euro Area of around 2%, which is the target set by the European Central Bank.
Yesterday, the 2036 BTp linked to inflation were purchased for 97.32 cents. The price is significantly below par and down compared to the issue of the first tranche a few months ago. It is affected by the general performance of the bond sector and of inflation expectations in the Euro Area.
Differences with BTp Italia
We are talking about a bond that protects the purchasing power of capital for an investor not only in Italy, but in the entire monetary union. Compared to Italian BTPs, BTPs linked to European inflation have slightly different technical characteristics. There capital appreciation occurs in a single solution upon expiry. For this reason, the gap between the price on the secondary market and the actual cost of purchase tends to grow as time passes. Cumulative inflation, in fact, increases the revaluation rate to be paid to the seller.
The best scenario for an Italian investor would be to purchase BTp linked to European inflation and in the holding period find himself with aItalian inflation decidedly lower.
Let’s take a rough example. Let’s imagine that we purchased the stock with the expectation of a 2% growth in Eurostat consumer prices. Instead, these will increase at an average rate of 4% per year. But not in Italy, where inflation will hover around 1%.
BTp linked to European inflation versus Italian inflation
What could we say in hindsight about such an investment? The BTp linked to European inflation will have offered us a return of 2% higher than expected. In fact, if we had purchased the Treasury bond with a fixed coupon, we would have obtained 2% less. Furthermore, it will have proved even more profitable in real terms. Living in Italy, our loss of purchasing power will be measured by inflation Italian. Therefore, we will have received an average return of 5.87% against an inflation of 1%. The fixed coupon bond would offer us a real yield of almost 3%, this one of almost 5%. Clearly, if Italian inflation were higher than Eurostat inflation, the reasoning would be reversed.
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