The Btp Italia booms: requests for 4 billion. This is how it protects against inflation

MILAN. The first day of placement of the new Btp Italia (coupon at 2%) closed with orders of almost 4 billion euros (3.64 billion). Demand exceeded that recorded for the previous edition of the government bond linked to Italian inflation which, last November, closed the first day of issue at 3.18 billion (5-year duration, coupon at 1.6%) . The total reached at the end of the period was close to 12 billion euro.

The placement of the nineteenth edition of the BTP Italia started today and will end on Thursday 9 March (this last day will be dedicated only to institutional investors). The new title will have a duration of five years (expiring in March 2028). The minimum annual coupon will be 2%, as announced last Friday by the Treasury. This coupon level is higher than the one decided for the previous round, in November 2022. At the time, the rate was set at 1.6%. As usual, the definitive coupon will be communicated at the opening of the fourth day of issue (Thursday) and may be confirmed or revised upwards.

The revaluation
Small investors are mainly attracted by the semi-annual capital appreciation due to inflation. A way to allow small savers to protect themselves from the high cost of living. Every 6 months, the BTP Italia pays its holder the recovery of the loss of purchasing power that occurred in that period, through the payment of the six-monthly revaluation of the subscribed capital. Furthermore, the coupons, which are also paid semi-annually, guarantee a constant minimum return in real terms. In fact, the amount of each coupon is calculated by multiplying half of the fixed annual coupon real interest rate, established at issue, by the subscribed capital revalued on the basis of inflation that occurs on a six-monthly basis.

This means that the coupon structure is characterized by a minimum fixed rate component of 2% and by one linked to the trend of inflation (specifically of the Foi ex Tobacco index). There will also be a loyalty bonus of 8 per thousand for those who purchase the voucher being issued and keep it in their wallet until it expires.

Inflation expectations
The official Italian inflation rate published by Istat last week recorded, for the first time in 5 months, a figure below 10% (9.2%) and the expectation is to end the year around 6 /7% average. «This forecast implies a very aggressive decline in the second half of the year» explains Paolo Barbieri Fixed Income Manager of Valori Asset Management.

For the expert, these estimates reduce the attractiveness of this instrument as it will be difficult for inflation to repeat the trend observed in the last 24 months and therefore there is a serious risk that investors may not benefit from the revaluation linked to the Foi as happened in recent times.

The Loyalty Reward
The new Btp Italia offers, as in past rounds, a loyalty bonus of 8 per thousand on invested capital (not revalued). Provided, however, that the investor who buys on the issue days holds the security until maturity.

The possible alternatives
«The new Btp Italia, in this historic moment, presents valid alternatives starting with the Btp curve which presents yields from 4% to 4.5% on maturities 2027-2033 – says Barbieri -. The European Corporate Investment grade market (which with a similar duration has yields between 4.5%-5%) also offers alternative solutions». For the expert, it is precisely in the latter sector that the most interesting offers can be found such as the Pirelli 2028 (XS2577396430) with a 4.65% yield to maturity or, alternatively with a retail cut, the Newlat 2027 (XS2289795465) and the Alerion 2028 (XS2455938212) at 5.15%. However, it is necessary to move with caution and always evaluate the liquidity of this type of bond. The BTP has on its side the fact that it is a highly traded and very liquid instrument and consequently it is possible to part with it at any time.

«These companies have solid fundamentals and can offer an extra return also on the Italian curve, with a limited duration – says Barbieri -. For this reason, while maintaining a certain degree of attractiveness thanks to the loyalty bonus and the capital appreciation effect, this instrument could be considered in a diversified portfolio that also has a component not linked to inflation through the above-mentioned instruments” .

Pressures on the bond market
In this phase, bonds are suffering from expectations of further aggressive rate hikes by the European Central Bank. Monetary policy affects above all the BTPs and the negative trend of the past editions of the BTP Italia, almost all in negative territory on the price side, is the confirmation of this. It means that those who buy may have to deal with reduced price quotas. This is what is happening, for example, with the last round of Btp Italia last November (and expiring in November 2028) which this morning is trading at 96.5 euros per share. It means 3.5% less on capital in just over three months.