Comparing BTPs, OATs, and Bonos: Which One Delivers Over 16% Returns in a Year?

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Diving into Sovereign Bonds: BTPs, OATs, and Bonos Compared

To diversify within the Eurozone sovereign bond market, let’s compare BTPs, OATs, and Bonos.
Each option is intriguing, but one of them stands out by offering over 16% returns in a year.

In a scenario of slowing economic growth without a recession, it isn’t enough to merely chase higher yields.
One must also consider the pricing impact stemming from a potential reduction in ECB rates from the current 3.50% to 1.75%, especially regarding the macroeconomic positioning and debt management in Italy, France, and Spain.

Evaluating the Economies of Italy, France, and Spain

Investing in government bonds entails betting on a country’s economy, as interest payments hinge on how well the government manages its finances and fosters economic growth.

Italy currently holds a high public debt level, but fiscal policies tightening alongside a €194 billion EU recovery fund cushion suggest a deficit reduction plan aiming at 2.8% within two years.
The country’s credit rating has shifted from stable to positive, reflecting improvements in debt management.

Conversely, France faces more challenges, with a Debt-to-GDP ratio exceeding 115%, projected to climb to 150% by 2050 without substantial reforms.
This pressures its credit rating and widens the OAT/Bund spread, now at 80 basis points, with yields surpassing those of Spanish Bonos.

Spain, however, illustrates more responsible debt management, showcasing a decreasing Debt-to-GDP ratio and a generally optimistic credit rating driven by resilient fiscal policies and post-pandemic recovery.
Such dynamics directly impact how attractive each country’s bonds are to investors weighing associated risk against growth prospects.

Yield Comparison of BTPs, OATs, and Bonos

Let’s directly compare the ten-year bonds from each state:

BTP (Italy) with ISIN IT0005607970, OAT (France) with ISIN FR001400QMF9, and Bonos (Spain) with ISIN ES0000012N35.

With the ECB rate stable at 3.50%, here are the current yields:

Bond	Gross Yield	Net Yield	Modified Duration	Reference Price
BTP 3.85% Feb35	3.85%	3.56%	8.29	102.71
OAT 3% Nov34	3.00%	3.01%	8.54	99.85
Bonos 3.45% Oct34	3.45%	3.02%	8.35	103.69

During Q3 2024, long-term Italian and Spanish bonds outperformed their French counterparts.
This success stemmed from lower spreads against German Bunds and OATs, while French bonds suffered due to political instability and budget deficit expansion.

The appetite for risk supported purchases of Italian BTPs and Spanish Bonos, with expectations of a stronger economic recovery and improved budget deficits alongside anticipated interest rate cuts.

Simulating the Impact of ECB Rate Cuts on Bond Prices

Next, let’s simulate the impact on bond prices if ECB rates fall from 3.50% to 1.75% over the next 12 months.
Typically, lower rates boost the prices of fixed-rate bonds since the yield from existing bonds exceeds that of new issuances.

Nonetheless, the demand for bonds also hinges on investor sentiment, shaped by economic conditions and perceived issuer risk.
In the case of French OATs, there are concerns surrounding the upcoming Moody’s rating review on October 25, which may downgrade France due to growing debt sustainability worries.
Such a downgrade may temper the positive impacts from reduced rates, keeping yields high to compensate investors for intensified risks.

Consequently, while a drop in ECB rates could increase OAT prices, the gain might be less pronounced compared to the potential rises in Italian BTPs or Spanish Bonos, both benefiting from more stable fiscal perspectives and growth.

Calculating Potential Earnings from BTPs, OATs, and Bonos

To grasp the impact of this scenario on BTPs, OATs, and Bonos, we can apply the formula that calculates a bond’s sensitivity to interest rate changes:

Percentage Price Change = – Modified Duration x Change in Yield

If you invest €10,000 in each of the three bonds today, here’s what you might earn within a year, assuming ECB rates at 1.45%:

Bond	Annual Coupon (€)	Capital Gain (€)	Total Gain (€)
BTP 3.85% Feb35	385	1,462.25	1,847.25
OAT 3% Nov34	300	1,289	1,589
Bonos 3.45% Oct34	345	1,462.25	1,807.25

In conclusion, investing in BTPs appears the most advantageous on paper: yielding a gross profit of €1,847.25, including coupon flow and capital gains.
The net yield, after a 12.5% tax, amounts to €1,616 (16.2%).
The Bonos follow suit with a gross yield of €1,807, reflecting a 15.8% net increase.

For further insights, explore linked discussions on BTPs versus OATs, which might reveal which investment offers better returns.

Disclaimer

The information and opinions presented in this article should not serve as the sole basis for making investment decisions.
Readers have absolute discretion in their investment choices and assume full responsibility as they are best aware of their risk tolerance and investment timeline.
The information provided is intended purely for informational purposes and does not constitute or should be construed as an offer or invitation to the public to invest.

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