BTPs indexed to European inflation are government bonds issued by the MEF (Ministry of Economy and Finance) which help defend savings from the increase in the cost of living. They work like normal multi-year Treasury bonds, but with one important difference: the principal and coupons increase if inflation increases.
Here’s how they really work, what the differences are with other more well-known government bonds and when they are really convenient.
How Btp€i work
Btp€i are government bonds designed to protect savings from price increases. These products do not take Italian inflation as a reference but that of the entire euro area. In fact, the calculation uses the harmonized index of consumer prices published every month by Eurostat which measures the average increase in prices in countries that use the euro.
Their operation is quite simple. When you buy one of these bonds, you lend money to the government and in exchange you receive a coupon every six months, in addition to the repayment of the principal at maturity.
The difference with traditional BTPs is that both the capital and the coupons are revalued based on inflation. This means that at maturity, the investor receives an amount that takes into account the price increase that has occurred during the life of the security. In this way the loss of purchasing power is recovered.
Furthermore, even if inflation were to fall, the repaid capital will never be lower than the initial one.
Btp€i are placed via auction and participation is reserved for authorized intermediaries, such as credit institutions and financial operators. However, private savers can purchase them later via their securities account.
What are the main characteristics of Btp€i
BTPs indexed to European inflation are government bonds designed primarily for medium-long term investments. The available deadlines are in fact quite long, they can reach 5, 10, 15 or 30 years. These are therefore suitable products for those who wish to protect their capital over time.
Btp€i are placed through an auction organized by the Ministry of Economy and Finance. The price and quantity issued, however, are not definitively established in advance but are decided based on investor requests, within a maximum limit communicated before the auction. Usually issues occur once a month but only when market conditions allow it.
Settlement of the transaction takes place two working days after purchase. It means that the payment and delivery of the title do not take place on the same day, but two days later. This applies both when the security is purchased at the time of issue and when it is purchased on the secondary market.
Upon maturity, the capital is repaid in a single payment. The amount is adjusted to the inflation of the period, guaranteeing the return of the entire sum initially invested.
How indexing works
BTPs indexed to European inflation protect savings from price increases while maintaining the purchasing power of the invested capital.
The real annual coupon rate is set at issue and indicates how much the bond yields in terms “real”, that is, net of inflation, remaining constant for the entire duration.
Coupons are paid every six months and their amount varies based on price movements. To calculate them, the annual rate is divided by two multiplied by the capital revalued at the time of payment.
Here is a practical example:
In the case of an investment of 1,000 euros with an indexation coefficient of 1.02, it is calculated on 1,020 euros.
The capital is revalued through the Indexation Coefficient (Ci), which reflects the inflation of the euro area measured by the Ipca index (net of tobacco). Thanks to the daily publication of the Ci by the Mef, both the capital repaid at maturity and the semi-annual coupons adapt to the cost of living, protecting the investor’s purchasing power.
What is target inflation?
The capital and coupons of Btp€i do not only depend on the real annual coupon rate but also on the reference inflation. This value indicates how much prices have increased in the euro area, but is not calculated on the same day. It is in fact based on data published by Eurostat in the previous two or three months, adjusted based on the day of the month.
The result is a precise number, updated daily by the Ministry of Economy and Finance, which allows you to know exactly how much the invested capital is worth today and how much the coupon to receive will be.
How reviews and reimbursement of Btp€i work
To update capital and coupons, the Eurostat index is used, which may be subject to revisions. If this happens after publication, the original index continues to be used for calculations and subsequent changes are not considered.
However, if the monthly index is not published in time, a replacement is used which is calculated based on data from previous months. This value is used to determine the interest and repayment of the principal until the definitive one is available, but the payments already made with the provisional index are not then recalculated.
At the time of reimbursement, the initial amount is multiplied by the indexation coefficient of the last day, which takes into account the increase in prices during the life of the security. If this value is less than one, the investor will still be guaranteed the return of the nominal value, avoiding losses on capital.
How Btp€i are placed
The placement of BTPs indexed to European inflation takes place through a marginal auction managed by the MEF. Before it takes place, the Treasury communicates the interval or the minimum and maximum amount. The price and final quantity assigned then depend on the operators’ offers. The auction is reserved for authorized intermediaries, who can submit up to 5 offers, each for an amount of no less than 500,000 euros.
After the main auction there is an additional placement which is reserved for “specialists in Government BondsThe share reserved for them is equal to 30% of the amount assigned in the main auction for new issues (first tranches) and 15% for reopenings (subsequent tranches).
The commissions paid to intermediaries depend on how long the security lasts, on the number of days between the auction settlement date and the security’s expiry, here are some examples:
- Btp€i Short term from 1 to 940 days, commissions 0.075;
- Btp€i 3 years from 941 to 1460 days, commissions 0.125;
- Btp€i 5 years from 1461 to 2190 days, commissions 0.175;
- Btp€i 7 years from 2191 to 3102 days, commissions 0.175;
- Btp€i 10 years from 3103 to 4562 days, commissions 0.225;
- Btp€i 15 years from 4563 to 6390 days, commissions 0.275;
- Btp€i 20 years from 6391 to 8765 days, commissions 0.275;
- Btp€i 30 years from 8766 to 9999 days, commissions 0.375.
