BTp Valore 4: the new Treasury placement for small savers

And there are four of them. Next week, the Treasury will place a new BTp Valore, the fourth in the series started last June, continued in October, and relaunched just two months ago with the third in a winning series with which Via XX Settembre has so far collected 53.7 billion euro from small savers (to whom the product is addressed). Record figures as well as Guinness figures, for a single product aimed at retail, are currently the 18.32 billion collected last March.

On 3 May, we will know the minimum guaranteed rate but the backbone structure of the 'BTp Valore 4' is already known and closely resembles the product placed in March: 6-year duration, increasing coupons (distributed quarterly, thus four tranches per year) with the 3+3-year 'step-up' mechanism. With a fidelity premium of 0.8% (i.e. 0.133% per annum) that will only be cashed in by those who purchase it during the placement (from 6 to 10 May) and keep it in their portfolio until natural maturity. After all, the formula of increasing coupons (the rate of the last three years will be higher than that of the first) is designed precisely to incentivise the small saver to hold the bond rather than sell it before time. A drawer logic, aimed at those who aim to collect coupons without focusing on the running variations of market rates and consequently of the prices of the security, which will be reimbursed at par (i.e. at 100) but in the course of its life will obviously, like all bonds, fluctuate.

The bond rule is as simple as it is initially counter-intuitive. If market rates fall (and they may do so because they may be discounting that in the future the central bank will in turn cut the cost of money and/or because the inflation outlook is diminishing) bond prices rise. The reverse is also true. If market rates go up (because perhaps inflation rises in the meantime and forces the central bank to do something about it by in turn raising the cost of money to try to curb it) the prices of those holding the 'old bonds' must fall. All this is to ensure that the total yield of the bonds already placed (which is obtained by adding the coupon to the difference between the redemption price and the market price) adjusts to the yield of the new bonds that, auction after auction, the various governments issue.

The other golden rule to know when investing in bonds is to know what scenario the market is already discounting for the future because secondary market rates do not necessarily match the reference rates set by the central bank. Where are we today? If we analyse the yield of the 6-year BTp currently trading on the secondary market, we discover that the market "prices" this maturity on Italy at 3.5%. These values are similar to those of last March: this leads us to deduce that the minimum guaranteed rate that the Treasury will propose today may not be too different from that of the previous bond: 3.62% on the average between the first three years and the next three, to which the annual portion of the fidelity premium should then be added. Considering that the Treasury in previous cases offered a bonus of 20-30 basis points over what was available on the secondary market, the gross yield of the new product could therefore fluctuate between 3.6% and 3.8%. But we will find out shortly.

The other consideration is that today's market rates discount a not particularly aggressive ECB in the coming years, precisely because there is no certainty about the fight against inflation. Rate futures maturing in 2025 discount that the ECB will cut rates in the next 18 months five times (including the first scheduled and discounted cut in June). This means that the price of the BTp Valore may go up in the course of time if the ECB cuts several times. Conversely, it may also fall if the Frankfurt institution is forced to keep current rates high for longer. This reasoning, however, is of relative interest to those who approach the BTp Valore with a pure drawer logic. Aiming at the regularity of the coupons (which will offer an interest rate higher than the average of the last 10 years), forgetting about possible price fluctuations.