Which of These 2 BTPs Offering Nearly 4% Yield Should You Choose with a 20-Year Maturity?

The Resurgence of Government Bonds: An Investment Favorite

In recent years, government bonds have made a strong comeback among retail investors’ choices for investment.
The reasons behind this resurgence can be attributed to a combination of factors, including reliable and predetermined yields, state-backed guarantees, ease of understanding, low associated costs, and capital security upon maturity.

This is certainly not insignificant.
Sometimes, in the pursuit of marginally higher returns, investors find themselves tempted by costly, complex, or opaque products that misalign with their risk profiles.
But why take that risk?

Investment Strategies Available in Sovereign Bonds

Typically, sovereign bonds are purchased with the intent to hold them until maturity, similar to a ‘buy-and-hold’ strategy.
Yet, despite being categorized as fixed-income investments, these bonds lend themselves to various operational strategies.

Investors seeking a stable cash flow often opt for medium-term bonds with attractive fixed or adjustable coupons.
In contrast, those wary of inflation’s damaging effects gravitate towards bonds linked to the cost of living, such as the BTP Italia.
Additionally, high-risk investors may lean towards long-term or foreign-currency bonds, placing less emphasis on coupon considerations.
In such scenarios, market trends—exchange rates and secondary market prices—often dictate the investment’s success.

Two BTPs Worth Considering: A Closer Look

Let’s delve into two BTPs set to mature in about 20 years, offering yields around 4%.
The first bond, ISIN IT0005162828, was issued in February 2016 and matures on March 1, 2047.
It boasts a gross coupon of 2.70% and an effective annual yield of 3.93%.
This yield is attributed to its current trading price under 100, specifically around 82.40 cents.

On the other hand, the Green BTP, ISIN IT0005438004, was issued during the COVID-19 crisis in October 2020 when interest rates were exceptionally low.
This allowed the issuer to offer a lower gross yield of 1.50%, despite it maturing in 2045.
With recent increases in ECB rates causing a decline in prices, the bond now yields approximately 3.86% based on its current price of around 67.40 cents.

Understanding Risk and Reward in Government Bonds

Despite being state obligations, these bonds may be better suited for investors with a high-risk tolerance.
Their extended duration can lead to significant price volatility on the secondary market, making them less ideal for those seeking a stable portfolio.

Consider an initial investor who bought these bonds around par value.
Today, in the event of needing to liquidate, this investor could face substantial capital losses, only partially offset by the coupon payments received.
This situation is exacerbated by two critical factors: significant capital depreciation due to inflation and the emergence of new investment opportunities with markedly higher rates and shorter durations.

For more insights into government bonds, you can check sources like Borsa Italiana.