What is a BTP?

Multi-year Treasury Bonds

Multi-year Treasury Bonds (Buoni del Tesoro Poliennali - BTP) are medium-long term credit instruments issued by the Treasury with maturities of 3, 5, 7, 10, 15 and 30 years. During the life of the bond the investor receives a constant coupon stream and, on maturity, a sum of money equal to the nominal value of the securities held.  Hence, as opposed to Treasury Bills (BOT) where the profit for the investor is derived from the difference between the purchase (or issue) price and the redemption amount, in this case there is the additional remuneration associated with the coupons.

The coupons are usually predetermined based on a fixed rate and payable at six-monthly intervals; the interest rate is set at the time of issue and therefore the amount of the coupons remains constant throughout the security’s life.

Also in the case of these public debt securities, the issuance takes place by auction; there is normally one issue each month.  These are marginal auctions in which no basic auction price is defined.  The MOT, the electronic bond and Government securities market, is the secondary market also for BTPs and this circuit therefore offers securities that have a certain residual life, at a current market price that may differ from the issue price as a result of the fluctuations in market rates.  Institutional investors prior to maturity may buy or sell the BTPs either on the regulated secondary market (MTS), for transactions of at least 2.5 million Euro, or on the non-regulated (over-the-counter) market.

The BTPs can be subscribed for a minimum nominal value of 1000 Euro or multiples thereof.

Multi-year Treasury Bonds are particularly suitable fixed-income securities for investors who are looking for a constant and definite stream of payments every six months.  The various maturities existing on the market make it possible to plan regular cash flows throughout the year.  Furthermore, BTPs are especially appreciated for their liquidity.

The main risk to which an investor is exposed when buying BTPs is market risk.  This is basically the changeability of a security’s price in case of sale prior to maturity.  A rise in market rates will entail a drop in the price of the BTP: to match market yields, in view of the fixed coupons, the quote will have to decrease, so that the investor recovers by way of a “capital gain” the difference between the coupon yield and that of the market.  Conversely, in case of a drop in interest rates, the price of the BTP will increase.

The risk is higher with the longer-term BTPs (15 and 30 years) compared to those with medium-term maturities (3 and 5 years).  Moreover, since the coupon is fixed, given the same residual life they carry a higher risk than floating-rate securities (CCTs).  With the latter, in fact, the price remains basically constant, because it is the coupon which varies according to market yields.

In any case, investors who hold the securities until maturity will certainly receive a reimbursement equal to the nominal value.