P.A.Forum - Rome, 8 May 2003
Dr. Maria Cannata - Director of Public Debt
MINISTRY OF ECONOMY AND FINANCE
DEPARTMENT OF THE TREASURY – PUBLIC DEBT
Why should one buy
Government bonds?
Bonds represent the ideal safe investment for
Italian investors because…
ü they
offer a wide variety of choices:
Ø different types of bonds
Ø wide range of maturities
ü they are easily tradable:
Ø listed by law in regulated markets
Ø easily tradable prior to maturity (at market
conditions)
Bonds do not guarantee very high
yields because…
ü
they are not risky
ü by assuming a greater risk you can earn
much more, but you can also lose the
nominal amount you invested!
ü the high yields of the past were in large
part due to “monetary illusion”
Rate of inflation and nominal rate of 12-month
Treasury Bills (BOTs)
25
Inflation
12 month BOT gross yield
20
15
10
5
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
0
The different types of bonds are:
Bond
Maturity
Remuneration
3, 6 and 12 months
Difference between nominal
value and issue price
CTZ
24 months
BTP
3, 5, 10, 15 and 30
years
CCT
7 years
Nominal value / issue price
difference
Fixed semi-annual coupon
and difference between
nominal value and issue
price
Floating semi-annual
coupon. Difference between
nominal value and issue
price
BOT
Characteristics of BOTs
Advantages…
ü short maturity
ü easy to manage because free of coupons (zero
coupon)
…but remember that
ü commissions are paid (with a maximum all-inclusive
limit)
ü the rates are, typically, inferior
ü they require frequent re-investment
Characteristics of CTZs
Advantages…
ü intermediate maturity
ü easy to manage because similar to BOTs
ü no commission
…but remember that
ü there exists only one available maturity
(24 months)
Characteristics of medium-long
term bonds
Which benefits are of interest?
1) a safe annuity over time
BTP
2) the possibility to sell back the bond at
any time, still obtaining an amount
equal to the capital invested
CCT
Characteristics of BTPs
Advantages…
ü guaranteed semi-annual coupon income
ü broad choice (maturity from 3 to 30 years)
ü no commissions
…but remember that
ü it is a medium-long term fixed-rate investment
(generally increasing according to maturity): in case
of sale prior to maturity there can be a capital loss
or a capital gain
Characteristics of CCTs
Advantages…
ü floating rate indexed to 6-month BOTs
ü yield periodically marked to market which
makes it easier to sell the bond
ü no commissions
…but remember that
ü the 6-month yield derived from the cashing-in
of coupons is not constant
How do you buy bonds?
PURCHASE AT
AUCTION
Booking at banks, post offices, or other authorized
dealers, without commission (except for BOTs)
Ø
Ø Calendar and issue announcements (available also on
the web site: www.tesoro.it and www.debitopubblico.it)
Ø Details on the flyer distributed at the PA Forum and
published on the web site www.debitopubblico.it
When do you buy bonds?
PURCHASE AT
AUCTION
1) Mid-month auctions: 3- and 12-month BOTs,
CTZ, 3- and 5-year BTPs
2) End-of-the-month auctions: 6-month BOTs, CTZ,
3- and 10-year BTPs
3) In alternating months: 15- and 30-year BTPs
Consult the issues calendar!
Medium-long Settlement
BOT & CTZ announcement
1st medium-long announcement
BOT & CTZ auction
How do you buy bonds?
PURCHASE IN THE SECONDARY MARKET
Ø Through
your own bank, the Post Office, or
other authorized dealers
Ø Subject to negotiable commission
Ø At market prices: bond trading takes place
according to the prices quoted in regulated
markets
What are regulated markets like?
Due to legal provision bonds are listed and traded in regulated
markets designed to centralize trading, thereby guaranteeing
that established procedures are respected. Markets are divided
as follows:
Ø wholesale markets in which only financial-institution
members can participate, and for elevated minimum amounts
Ø retail markets where individual investors, through financial
intermediaries, can exchange even small amounts
The existence of the wholesale market facilitates the
functioning of the retail market, in that it guarantees a
significant reference to the level and volume of bonds traded
Tax regime
The tax regime of interest on Government bonds is
12.5% and it applies:
ü for BOTs and CTZs to the difference between 100
and the issue price of the bond (which represents, for
these zero-coupon bonds, the corresponding
remuneration)
ü for BTPs and CCTs to the coupons and to the
difference between 100 and the issue price of the
bond (when the issue price is less than 100)
Tax Regime
Ø
Managed earnings regime :
to facilitate the fulfilment of fiscal
obligations to the Treasury, the tax is
applied directly by the bank in which
bond deposits are made
Some aspects of the innovative
management of public debt
With the “dematerialization” of Government
bonds, as of 1998 bonds are no longer in paper
form
Ø
Ø This has brought about notable benefits with
regard to their custody and management: they can
no longer be lost, stolen or forgotten (as, for
example, in the case of bonds that are inherited or
those stored in safety deposit boxes)
Some aspects of the innovative
management of public debt…
slump in yields is
also due to a more
efficient management of
public debt and has
allowed for a notable
savings in the expenditure
for interest, to the benefit
of all citizens
Interest expenditure in relation toGDP (% )
14
12 11,4%
10
8
6
4
2
0
5,7%
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
Ø The
Trend of the ratio of public debt to GDP
130%
124,3%
120%
110%
106,7%
100%
90%
80%
70%
60%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Where do you get information?
in the major newspapers
(financial and otherwise)
on the Public Debt web site
www.debitopubblico.it