Co-founder of Affari Miei Independent Financial Advisory Company
November 10, 2023
Il BTP 2051 (ISIN IT0005425233), issued in October 2020, is one of the multi-year Treasury Bonds with the longest maturity in the panorama of Italian public debt. With a annual coupon dell’1,7%divided into two semi-annual instalments, this security has seen its value halved following the policy of increasing interest rates started in the summer of 2021 by the ECB.
Given the current context, convenient think about this government bond to invest?
And if we already have it in our portfolio, what are the forecasts?
Let’s try to talk about it in this analysis in which I will provide the opinions general affairs of Affari Miei on investing in BTp.
This article talks about:
The value of the 2051 BTP has undergone a significant decline in recent years, going from 107 in February 2021 to 54 at the end of November 2023. This decrease reflects a global phenomenon that has affected the bond markets, not limited only to the Italian or European context. Similar examples can be found in German and French stocks, which have seen even steeper declines.
In addition to the rate hike, the agencies’ assessments of rating represent a further factor that could influence the price of BTP 2051. Upcoming reviews by Moody’s and other agencies could have a significant impact on the value of this and other government securities.
Is it worth investing?
If we want to invest we must, first of all, understand how much this BTP yields. Despite price fluctuations, it is essential to remember that the BTP 2051 will be repaid at the face value of 100 on maturity. What matters, therefore, is not so much the current price but the return it can offer until the end. Currently, the estimated annual return is approximately 4,3%.
Let us remember, however, that a significant part of our return is given by the difference between the purchase price and the nominal return value: by buying, for example, at 54 we will receive the 1.7% coupon every year (which in our case will be higher because the capital employed is lower) but we will have to wait 28 years to receive our capital (the 54 that we actually invest if we acted today and the difference, which for us is return, which separates us from the 100).
The greatest risk, in this period of time, is undoubtedly linked toissuer: Italy is one of the countries most at risk in the world due to high public debt and 28 years is an objectively immense period that justifies all the distrust of investors. On the topic of country risk and the possibilities that CACs should be applied, I recommend this article.
An investor should ask himself these questions:
Does it make sense to lock yourself in for 28 years to get 4.3%? Can I consider a long-term investment in one of the most indebted countries in the world and with a stagnant economy safe? To about, here are some reflections; Some more astute investors might think of buying now to resell in a few years, when the rate trend should change: but a speculative operation makes sense to ensure just a few additional points of return, sacrificing thecompound interest What should be the real goal of an investment portfolio?
Don’t know how to invest?
Find out what kind of investor you are. Are enough 3 minutes to discover the best strategy for you.
>> START NOW! <
Future forecasts: does it make sense to divest if we are at a loss?
Contrary to the situation of those who evaluate the investment, there is the opposite of those who have this security in their portfolio and are worried about the strong devaluation.
In general, if we stick to pure interest rate risk we have probably reached the minimum peak or are close to it: rates are unlikely to increase much further and, if you have this title you have understood it at your expense, an increase in interest rates ECB produces a reduction in the price of the BTp.
If country risk increased, however, the situation could get even worse because this is another variable connected to BTPs.
So what to do?
Much depends on the reasons why we bought which investors often forget within a few years.
If the aim was to park liquidity for a few years, in fact, this product was structurally wrong because it exposed exactly the risk you are experiencing.
Selling, therefore, definitely means losing money.
The only way not to lose money is to bring the bond to maturity which, for those who bought at the time of issue, means taking a relatively low coupon and waiting until 2051.
Another alternative could be to wait a few years and sell when there is a recovery but, in all likelihood, the value will not approach 100 any time soon assuming that there will not be a black swan again like COVID which will lead the Central Banks to reset rates .
You should understand the reasons why you bought this BTP, what you expected to get and, above all, what is the role of this instrument in your overall strategy and portfolio.
If all this confuses you, I highly recommend you read this article in which I explain our methodology.
Additional helpful resources
If you are new to this world, I recommend you start with these articles to get a general idea about money management.
Enjoy the reading.
Find out what kind of investor you are
I have created a short questionnaire to help you understand what type of investor you are. At the end, I will guide you towards the best contents selected based on your starting situation:
>> Get Started Now <