Dealing with the world of finance and investment today is anything but simple. the supposedly zero risk is almost aUtopia.
How to extricate oneself from a market that is increasingly complex to monitor, interpret and understand, in which a cough overseas is enough to create tremors in Europe?
To exist again the zero risk investments? THE Government bonds are a safe haven? From construction can they trust me and feel comfortable?
The answer is: I can trust until proven otherwise and be relatively comfortable enough. Although I always have to pay attention to what is happening in the world. The economic situation changes rapidly and often abruptly: unforeseen events, such as the pandemic, in the short and medium term can cause considerable shocks.
With reference to constructionwe highlight what is published by the site Ansa.it:
“The Treasury placed all 7.75 billion BTP at 3.7 and 20 years, but I interest rates rise sharply on the three deadlines. “
Good news? Maybe for those buying today. Not for that Italian state that pays higher interest to finance itself, not for those who have BTPs in their portfolio at lower rates.
Then there is this cursed word, that is to say “Spread” (differential between BTP and German Bunds) that does not make you sleep peacefully, as evidenced by the subsidiary
“While the Italian spread has not increased more than that of other countries, the fact remains that the owners of the BTPs have suffered a considerable loss in the space of a year.”
How to behave then?
Construction: what is it?
It is necessary to start from the basic concept, that is to say: that what are construction works?
First of all, these are bonds (also called public debt securities) issued by the Italian State.
Take the example of the site dt.mef.gov.it and extract the synthetic definition:
“BTPs, Multi-year Treasury Bills, are medium/long-term securities, with a fixed coupon paid semi-annually.“
The coupon is determined by the interest rate set at the time the bond is issued. The withholding tax must then be deducted from this gross rate. How much, in percentage?
We get the response from the site leobbligazioni.comWhere:
“With the entry into force of Legislative Decree no. 66 of April 24, 2014, whose conversion law was published in the Official Gazette of June 23, 2014, in fact, the taxation of all Italian government bonds remains 12.5% both with regard to coupons and with regard to any capital gains. “
With a minimum subscription amount equal to €1,000 it is a form of investment accessible to all.
Construction: how investment works
The investment in Multi-year treasury bills has a medium / long term horizon. This means that normally it is assumed that the security will be held in the portfolio until maturity.
On a semi-annual basis, the fixed coupon is detached which, net of the tax rate of 12.50% (as previously indicated), is credited to the current account. The titles in question, as well as all titles, are dematerialized, Where there is no physical certificate representing them.
Indeed, on purchase, they converge towards a securities deposit that the buyer opened with his own bank. All operations will therefore relate to the securities account and the settlement on the current account attached to it.
THE BTPs are fixed rate securities. What does it mean? In simple terms, this means that, for the whole duration investment, whether 3 years or 50 years, the amount paid every six months at the coupon level will always be the same.
It would therefore seem to be a secure investment, which avoids capital losses and protects against market fluctuations and financial variables.
But will it be true? Can we buy it and sleep peacefully? If we have to sell some or all of our investments before nominal maturity, do we have any problems or is everything smooth as oil? Let’s try to figure it out together.
BTP: issue, market and redemption price.
Things don’t always go according to plan. It should be noted that most of those who buy the construction, they do so with the intention of keeping them in their portfolio until they mature. However, this is only one possible point of approach to the title.
Another possibility, on the other hand, is to invest in long-term BTPs in order to be able to gain on the fluctuation of prices.
And yes, because the title has a issue price and a redemption price. the issue price it can be identical to the nominal value, that is to say, as we say in technical language “au pair” (100). However, the title can be issued “below average” (therefore below 100, or below its nominal value) or even “above average” (greater than 100).
Obviously, this has repercussions on the final return on investment and therefore this factor must be taken into consideration.
Between the issue price and the redemption price, throughout the life of the security, there is what is called market price. What is that? the the market price is the reference value of the security on a given day, value at which the security can be sold or purchased. Again, the daily market value may be far from the issue and/or redemption price.
What affects market valueor the fluctuations that the price of a BTP can have on a daily basis?
Construction: market fluctuations
The term and interest rate facial are the two factors which, together with the general economic contingency and the spread, influence the evolution of the price of a BTP.
The longer the maturity of a security, the greater the chances that it may experience even large price fluctuations. Up or down. Obviously, in relation to the nominal interest rate and the market situation.
What do we mean by referring to the “market situation”? This means that, in a phase of falling interest rates, the performance of a BTP already present on the market with a maturity of ten years, thirty years, fifty years, will have positive fluctuations in the capital account which are also important. Indeed, if market rates fall, market buyers will pay more for an existing security that pays a higher coupon.
Conversely, in the event of a rise in market rates, the exact opposite will occur and the price of our BTP will undergo negative fluctuations with potential capital losses.
Construction: how to behave if I have some in my wallet
The question that therefore arises is: how should I behave in a phase like this, if I have BTPs in my portfolio with a more or less distant maturity? Should I fear for my capital or can I still be reassured?
let’s say it risk greater, in these cases, would be that of insolvency of the issuer. So if you think the Italian state is on the brink, then you must be scared. Conversely, the risk of default should not affect you in the least.
However, it is evident that in certain phases where the market discounts the possibility that the issuing country suffers a deterioration in terms of economic scenario and macroeconomic data, the perception of risk increases considerably (and, therefore, our share prices experience negative changes).
However, there is another concern, given bymarket price fluctuations in a phase of economic contingency characterized by an increase in inflation and, consequently, by a reduction in the expansionist policy of the various central banks. Indeed, the increase in the inflation rate in a way higher than expected, led to the opposite path, namely that of a restrictive policy (rise in interest rates).
For this: if you are supposedly “drawer players”, or those who buy a security not with speculative intentions, but with the intention of keeping it in their portfolio until maturity, you should pay attention only to the rating of the Italian State and take advantage of semi-annual coupons . On the contrary, if you made a different initial choice, you must ask yourself why you still have the security on your securities account today. Because, in this economic phase, you will not have good news on the capital account.
Construction: a practical example
Rising interest rates lead to higher costs for those who take out new loans or loans, for those who have to request an overdraft from the bank. For whom does he have BTP? Let’s take an example by considering a construction issued in 2015, with maturity 2032at nominal rate 1.65% with an issue price equal to 99.501coded ISIN IT0005094088 .
During its lifetime, the stock in question reached a maximum price of 111.6 in February 2021 and a minimum price of 79.38 in November 2018. The last price is equal to €98.46that is, just below normal.
As you can see, over the course of about seven years of life, although it is a government bond, this BTP. had one truly remarkable price swing. This means that, as in all investments, there is a percentage of risk even when investing in securities considered ultra-safe in the collective imagination. This is just to remind you of an important concept: no investment is completely 100% safe. It is essential to be aware of this.
Construction: calm and strong objectives
What to do then? First of all stay calm and nervousbearing in mind what are the purposes for which the BTPs were purchased and in what context personal financial planning they will fit together.
If your needs or your family situation have not changed since the time of purchase, you can keep the securities with complete peace of mind, continuing to receive the coupons until maturity.
If, on the other hand, something has changed in the background scenario, then it is good to reconsider everything, that is, your financial planning in its entirety to adapt it to the new needs.
The important thing is to always move with consciousness where to stay consciously still.
There is no right or wrong behavior – there is your choice based on your life experience and goals.
Consultant in financial insurance, born in 1971.
Chartered accountant diploma, without ever having liked accounting,Lb Alberti Commercial Technical Institute of Lucerne (To). Passionate about football and writing, Juventus and poetry are my two great loves. I have published four books of poetry. The last, from the title From the small death to God, embodies the sublimation of love in its psychophysical sense closest to God, that is, orgasm. Writing is my drug: abstinence or crises of rejection are two sides of the same coin.