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Government bonds are the cornerstone of public debt financing and also constitute the basic benchmark for the domestic bond market. The combination of duration, coupon rule, issuance technique and depth of the secondary market determines: average cost of debt for the Treasury, sensitivity to rates, transfer of inflation risk and liquidity of the financial system.
Includes instruments with limited maturity (BOT and, for economic construction, CTZ in the short-long segment) typically without coupons and with issues below par. The performance is driven above all by dynamics of monetary rates and central bank policy.
From a risk perspective, they have a limited duration but greater reinvestment risk: at each renewal the new level of return depends on the current market environment.
It includes fixed rate BTPs, variable rate CCT/CCTeu and inflation-indexed BTP Italia. This area of the curve governs the structural part of the cost of debt and the intertemporal profile of sovereign refinancing.
The main risk varies by type: interest rate risk for fixed-rates, spread risk and reset-lag for floating rates, real inflation risk for inflation-linked ones.
They are central tools for tactical Treasury cash management and for anchoring the very short end of the domestic risk-free curve.
The instrument follows pure discount logic. The simple annual return is:
\[ r_{BOT}=\frac{100-P_0}{P_0}\cdot\frac{365}{T} \]
In reverse form, once a target yield \(r\) is set, the theoretical price is:
\[ P_0=\frac{100}{1+r\cdot T/365} \]
where \(T\) is the number of days to expire.
They have low price volatility compared to long securities, but not zero risk: in the event of shocks to short-term rates the mark-to-market may vary in the residual period. They are used as liquidity parking, collateral management and construction of the initial section of the interest rate curve.
They are the reference for measuring the sovereign risk premium on the medium-long term.
The price is given by the current value of coupons and redemption:
\[ P_0=\sum_{t=1}^{n}\frac{C}{(1+y/m)^t}+\frac{N}{(1+y/m)^n} \]
with \(C=N\cdot c/m\), \(m\) coupon frequency, \(n=m\cdot T\). By increasing \(y\), the price drops; sensitivity is summarized by duration and convexity.
For the investor: interest rate risk and sovereign spread risk. For the issuer: a lock-in advantage on nominal funding cost over time. In the portfolio, BTPs are used for carry and positioning strategies on the curve and management of the target duration.
The periodic coupon is linked to a monetary index (typically Euribor 6M for CCTeu) plus a fixed spread:
\[ c_t = Ref_t + s \]
The reset reduces the effective duration compared to a fixed security of the same legal maturity.
In stable conditions, the price tends to gravitate close to par, but can deviate due to:
They are suitable tools when you want to reduce exposure to structural increases in nominal rates, while maintaining the risk of the Italian issuer. In asset allocation they serve to contain price volatility compared with fixed-rate BTPs.
The revalued capital follows the price index (FOI ex tobacco):
\[ N_t = N_0\cdot\frac{I_t}{I_0} \]
The gross coupon for the period is applied to the revalued capital:
\[ Cedola_t = \frac{c_{reale}}{m}\cdot N_t \]
The security separates the real component and the inflation component, allowing implicit observation of the real rate required by the market for Italian sovereign risk.
It is a partial purchasing power hedging tool for investors with real needs.
While reducing the risk of unexpected inflation, real-rate risk, sovereign-spread risk, and residual liquidity risk remain. In the event of rapidly falling inflation, the advantage compared to a fixed BTP can be significantly reduced.
They represent the bridge between the money market and the short-medium duration bond segment.
As with all zero-coupons, the yield is incorporated into the initial discount:
\[ r_{CTZ}=\left(\frac{100}{P_0}\right)^{\frac{365}{T}}-1 \]
Useful formula when working with comparison on an actual annual basis.
They are used for fixed-date objectives and for curve strategies in the 1-2 year segment. The risk profile is intermediate: higher than BOTs, lower than long fixed coupon securities.
Qualified operators present offers with quantity and price/yield. The assignment follows the ranking of the proposals until the amount offered is covered. It is typical for instruments where price discovery very close to the money market counts.
In the marginal auction, the awarded securities are assigned at the closing price (marginal price), favoring ex-post transparency and homogeneity of assignment.
For complex issues or new long lines the placement syndicate can be used to stabilize initial distribution and improve the quality of institutional demand.
Banks and authorized intermediaries participate in the primary and support the liquidity of the secondary through market making activities. The quality of the secondary reduces the required liquidity premium at auction and helps to contain the overall cost of sovereign funding.