Savings Account vs. Government Bonds: Which Is the Better Option for Accessing Funds in One Year?

Which is Better: Deposit Account or BTP If You Need Funds in One Year?

The recent ECB interest rate cut, reducing borrowing costs to 3.25% from 3.50% in September, has made both deposit accounts and government bonds (BTPs) potentially less attractive for investors.
As signs of gradual monetary easing emerge, many savers are rushing to secure existing yields before further cuts in December and possibly more substantial reductions in 2025.

However, the choice between a deposit account and BTPs warrants careful consideration.
This decision extends beyond merely comparing yields and maturities; it also requires assessing one’s risk tolerance and investment horizon.

Deposit Accounts vs.
BTPs: Yield and Differences

Deposit accounts offer a straightforward, low-risk saving solution, easily managed through online banking.
Their safety is ensured by bank participation in the Interbank Deposit Protection Fund (FITD), which guarantees reimbursement of up to €100,000 in case of bank failure.
Currently, the nominal yield for deposit accounts remains below 4.10%.
To secure this yield, funds must be locked in for specified terms, ranging from three months to five years.

In comparison, while BTPs provide a potentially higher return, they carry inherent risks.
For instance, a 5-year BTP currently yields 3.85% but has a net return of just 2.52% after taxes.

When examining a typical investment of €10,000, BTPs and deposit accounts yield different net returns depending on their duration and interest rates.

Convenience of Withdrawals in One Year

The deposit account advantage diminishes significantly if funds are needed within a year.
Unlike BTPs, which can be liquidated anytime, deposit accounts may incur penalties for early withdrawals, significantly reducing their effective yield.

If ECB rates decrease from the current 3.25% to around 2% by 2025, the market value of BTPs will appreciate, complementing the coupon received.
Hence, in a falling rate environment, BTPs generally offer better returns than deposit accounts.
For example, withdrawing from a Banca Progetto account early could reduce the interest rate from 3.85% to merely 1.50%.

When to Choose a Deposit Account

Opting for a deposit account depends on three critical factors: one’s risk appetite, the duration of the investment, and expectations around declining rates.
More conservative investors often prefer deposit accounts to safeguard their returns from market fluctuations.

When to Invest in BTPs

In a low-interest context, BTPs can be appealing, especially when focusing on longer durations.
When interest rates decline, older BTPs become more attractive than newly issued ones due to their higher yields.
This dynamic encourages some investors to liquidate their holdings before maturity to capitalize on appreciation.

Conclusion

The ongoing decrease in ECB rates has substantial impacts on investor behavior and broader economic conditions.
For those seeking lower-risk solutions, deposit accounts can be suitable if timelines are appropriately managed.
Conversely, investors willing to tolerate more risk may find BTPs offer more lucrative options and greater flexibility.