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The first risk of lowering Italian public debt took place on Friday, April 24, but Standard & Poor’s left everything unchanged. Then on Wednesday the 29th, there was the rejection of the Fitch rating agency (BBB level), which judged that debt at a level just above the “garbage”. Beyond technical opinions, the real dilemma revolving around government bonds and degradation: What should the saver fear? Let’s try to understand more.
Price and performance: how do they move?
One of the first consequences of Fitch’s decision was that performance skyrocketed. The proof was obtained in the ten-year BTP (expiring in August 2030) which jumped as much as 30 points compared to the auction in late March. Said in terms of interest, there was a transition from 1.48% of the previous March issue to 1.78% a few days ago.
Now, a “law” linking all corporate or government bonds that are related to the trend between price and yield. Where price means the market cost of a given bond at each instant of trading. Although the yield is the interest that the individual issue recognizes to its owner and throughout the duration of the loan. Basically, when yields go up, the prices of the bonds already issued go down. Why? Simple: the market gets rid of old problems (sells them) to buy new ones, which are more convenient.
What should those with previously purchased BTPs fear?
It is now clear that this question is shaking the millions of security holders who have had it in their wallet for months, if not years. That is, they bought it when the differential was lower than the current one and, therefore, the prices of the bonds were higher than the current ones. What actually happened? It is very likely that its market price is lower than what they said to buy it. Should they sell? Certainly not, because they would face a loss, the so-called capital loss For example, it could happen that they bought 100 and today they find it at 98.5, that is, 1 cent less. That multiplied by substantial investments, they make beautiful differences. Do they have to fear? No. For them, in fact, it is enough to wait for the natural maturity of the bond and they will receive 100, or the same face value of issue.
And who would you buy it for now?
Certainly, the speech could be more interesting for those who, instead, are going to buy it today where the spread has increased. Why? the upward margin drags the interest back, which lasts for the duration of the loan. So if today Mr. Rossi bought € 10,000 of 10-year BTP at 1.78% and perhaps in a few months the differential would drop like before Covid-19 times, surely the market price of his BTP would increase. Here too, the reason is simple: if the spread falls, future issues will offer much less than the current 1.78%. What would the market do then? I would buy bonds at higher rates, like last week. But in doing so, it increases market prices, generating what is jargon called capital gain. In this case, government bonds and degradation, what should the saver fear? Absolutely nothing.
