Multi-year Treasury bill: European and Italian

One thing that is not widely known is that Italian BTPs (Multi-Year Treasury Bonds) can be indexed to European inflation. 

However, not all of them are. The official website of the Italian Ministry of Economy and Finance lists as many as eight different categories of government bonds, of which as many as five are BTPs. 

The standard Multi-Year Treasury Bond, which is the traditional basic one, pays a fixed semi-annual coupon that is therefore not indexed to inflation. Thus, once subscribed, its nominal yield is fixed until maturity. 

This, however, means that in the event of inflation, the real yield decreases, although the nominal yield remains fixed, because for the same amount paid semi-annually its real value decreases, i.e., the purchasing power of the money one receives as coupon payment. 

To be fair, the so-called BTP Green also pays fixed coupons that are not indexed to inflation, but for the other three types of BTPs things are different. 

The most complex coupon is that of the BTP Futura, because in addition to being semi-annual it also has a step-up mechanism for calculating yields, which are increasing with a loyalty premium at maturity. 

However, even in this case, the real value of these yields goes down if inflation rises, because as much as they are increasing, they are still prefixed in nominal values. 

The Multi-Year Treasury Bond indexed to inflation

However, there are two BTPs that have coupons indexed to European inflation. 

These are the BTP€i and the BTP Italia. 

The former is a Multi-Year Treasury Bond precisely indexed to European inflation. It was created to provide investors with protection against rising price levels, because both the coupons paid semi-annually and the principal repaid at maturity are revalued based on inflation as measured by Eurostat through the Harmonized Index of Consumer Prices (HICP) in the Eurozone, excluding tobacco-related products.

In this regard, the ministry writes: 

“Thanks to the indexation mechanism, at maturity the holder is recognized to recover the loss of purchasing power realized over the life of the bond. In any case, the Btp€i guarantees the repayment of the subscribed nominal value: even in the event that a reduction in prices occurs during the life of the bond, the amount repaid at maturity will never be less than the nominal value.” 

A very similar thing applies to the BTP Italia, which is a multi-year Treasury bond indexed to Italian inflation, designed specifically for retail. 

The index used for revaluation is that of consumer prices for blue- and white-collar households (Foi) in Italy, calculated by ISTAT always net of tobacco products. 

While nominal yields on already subscribed fixed-coupon BTPs have not increased, nominal yields on inflation-indexed BTPs, on the other hand, have increased in recent months. In contrast, the real yields of already subscribed fixed coupon BTPs have actually fallen, while those of inflation-indexed BTPs have remained relatively stable. 

Until 12 months, nominal yields hardly exceeded 1% per year, while today they can go as high as over 4%. 

However, it is not only the nominal yields of inflation-indexed BTPs that have increased. Inevitably, the nominal yields of the new fixed-coupon BTPs being issued have also increased. 

Are BTPs a good investment?

This means that at a time when inflation is particularly high, such as this one, if inflation starts to fall soon, fixed coupon BTPs could again become worthwhile if the nominal yield is high. For example, if inflation were to return to 2%, someone who had taken out an annual fixed-coupon BTP today with a yield of 4% might gain more than someone who chose inflation-indexed BTPs. 

Indeed, since that 4% was calculated on the basis of the last six-month coupon, if the situation remained constant after the second coupon, the annual yield would reach 8%. 

That is why there is a lot of attention in Italy right now to government-issued multi-year Treasury bonds. For years during which inflation has been very low, BTPs have not been able to attract much interest, while now all of a sudden they are becoming much more attractive investment products than they have been in recent decades.