On the markets, in recent weeks, the name that recurs most often is that of Paul Volcker BTP. The strong-willed Fed president in the days of Jimmy Carter is becoming the mirror – and the specter – of what central banks seem determined to pursue: a relentless fight against inflation and – especially in the US – at any cost. The “collateral damage” of a recession can be counted because now it is no longer time for medicine but surgery.
Meanwhile, those who are a weaker struggle in the financial markets. And Italy, with its string of records in terms of public debt – third largest public debt in the world, among the top ten about GDP, second in the Eurozone in terms of debt growth since the outbreak of the pandemic – does not is an exception. The numbers are truly impressive: the returns of the BTP in 10 years went from 0.833% twelve months ago to 4% a few days ago, and then back to around 3.7%.
Prices fell as a result (since the coupon is a fixed rate, the adjustments are made to the prices, for securities already in circulation): the “red” in the most difficult moments reached 20%. A lot for the government bond segment, and it is even worse if you look at the more distant maturities in time, while on the contrary, the BTPs that expire in five years have reported losses of between 9 and 14%.
The disease inflation
The disease is known, inflation, the treatment uncertain and not without contraindications. “It’s a new world and the pace adjustment is neither simple nor immediate – explains Rony Hamaui, economist and lecturer at the Catholic University – the central banks themselves demonstrate this, which are rapidly and constantly adjusting their monetary policies. “The most recent proof is the ECB, which after some changes of pace has announced measures to take action. given the landslides of spread in some Eurozone countries, Italy in the first place.
“At this stage, the political factor must also be considered with great attention – continues Hamaui – in the United States everyone is nervous about the mid-term elections: no President was never re-elected with high inflation and skyrocketing oil and gasoline prices. This creates pressure on the Fed and its decisions. The ECB has less of this problem, but it has others: a more indented internal composition and different public debts. In all this, Italy is confirmed as the weak link. I don’t think we are on the eve of a new 2011, but the recess is over “.
The memory of what happened ten years ago, with all the differences in the case, is a recurring element: “We are not in 2011 but in some ways, it is not a better situation – says Andrea Seminara, CEO of Redhedge Asset Management – because at the time central banks knew how to fight the liquidity crisis, but with inflation on the supply side, we don’t know what to do. “So far, the ECB’s announcements have only partially succeeded in stabilizing the markets. In recent days they seemed to openly challenge the authorities, almost in search of the breaking point.
This is always the case when an attack starts. broader movement, which also involves other public bonds and stock exchanges. The “whatever it takes” that with Mario Draghi marked the turning point, so far it has only worked halfway: it has cut the nails to the toughest speculation, but the perception that traders still aim to test the strength and determination of the ECB remains creeping.
The final word will only be there when the announcements move to the official measures, probably on 21 July. “Very high inflation puts tension at a time when European cohesion is being tested by various factors – underlines Luca Cazzulani, Head of Strategic Research for Unicredit – At the moment the markets are discounting ECB rates to reach 2, 5% by 2023. Such an amount increase would end up negatively impacting growth. As for the impact on sovereign spreads.
The dance of the markets
In the meantime, the markets dance. The prices of BTPs too, as we have seen. For savers who have them in their portfolios, however, the losses are only potential, until they sell. At maturity, the repayment is always “at par”, ie at 100. So, unless you have bought at higher values, there are no losses if you continue to keep them in your portfolio, and in the meantime, you collect the coupons. In this respect, there is certainly an indirect “damage”: investing the same figures now would result in higher returns; however, it is a loss of profit, not a deadweight loss.
For the Treasury, the same reasoning is partly valid, reversed: on the existing debt at a fixed rate, it continues to pay the same interest. On new issues no (and the increases are already seen: 0.71% average at the end of May, compared to 0.1% in 2021) and not even on inflation-linked securities. Not only on Italian BTPs (which will return to issue this week, after two years of absence) but also on BTPs linked to European inflation: in all, around 250 billion bonds (11% of public debt): one percentage point more inflation means 2.5 billion higher interest rates for the MEF.
For the saver, however, they are interesting: “If the objective is to protect the capital from inflation and the bonds are kept until maturity, portfolio manager credit strategies of Plenisfer sgr – even if we must not think that the guarantee is total, concerning the fluctuations of prices on the secondary market: the mark to market can also be negative. But if the investor expects persistent inflation and controlled government spreads, they are an excellent tool. “Between now and the end of the year, 130 billion bonds will mature, excluding Bots. For the MEF, the task will not be light.