Savings: the twin BTp bonds are here – here’s a comparison

From 19 to 23 October, an unprecedented simultaneous placement of two securities has been scheduled. On offer will be a traditional BTp Valore, with a five-year maturity, quarterly coupons and a yield that rises over time based on the now familiar ‘step-up’ mechanism, whereby interest increases after a certain period (the progression will be announced in the coming days). However, it will be accompanied by its ‘different twin’: this will be called the ‘BTp Valore Insieme’. It will have a five-year maturity like the first but will pay interest in a single lump sum at maturity, in a final ‘maxi-payment’ that will, of course, also include the full repayment of the principal invested.

With the scheme announced on 25 September, the Ministry of the Economy remains true to the original philosophy behind the BTp bonds named ‘Valore’: a family of government bonds reserved for small investors and households, but with features that may vary from time to time depending on market conditions or the desire to inject some fresh ideas into the landscape: currently characterised by a rising trend in interest rates that shows no sign of ending any time soon, fuelled by inflation that would require a geopolitical shift – which seems unlikely at present – to change course. In any case, this dual-track proposal is unprecedented in the retail market and warrants further clarification.

First of all, it is necessary to put the comparison of the yields on the two securities into context. They are financially equivalent, in the sense that the single final coupon on the BTp Insieme will be calculated to match the overall yield of the traditional security. This equivalence must be calculated on a discounted basis to take account of the different interest payment schedule. In practice, the final coupon payment on the BTp Insieme will not simply be the sum of those on the BTp with periodic coupon payments: it will be higher, to take account of the fact that, having not received the interest payments, the investor has been unable to reinvest them and thereby secure an additional return. In short, the BTp Insieme requires you to wait: but it rewards that wait.

The structure of this single-coupon bond is therefore designed for savers who wish to use this method to combat the effects of inflation but do not need or wish to receive payments in instalments. For those interested in the latter aspect, however, the traditional BTp Valore continues to offer coupons at an accelerated quarterly rate, designed to convey the idea of a sort of additional income.

There are also other variables to consider, though these only apply to those who sell their BTps before maturity (an option that is always available, as with all government bonds). Generally speaking, the coupon payments bring forward the break-even point – the point at which the investor recovers the present value of the capital invested. This factor affects the implied interest rate risk associated with the two instruments, making the market price of the ‘BTp Insieme’ generally more sensitive to changes in interest rates.