This is my first post here writing about money and finance, so first, let me make a short introduction.
Assuming we are living in a multigenerational model, we all receive an asset endowment, work, consume, and save. Thus, for me too, this has meant receiving an initial wealth when I was born in \(t_0\) (thanks mom and dad), and up until a few years ago, I assume the interest rate on my savings to be \(r=0\) because I didn’t lend them to anyone. Starting from 2019, I have begun earning a wage for my occasional jobs (programmer, teacher or other mini-jobs). I’ve always saved nearly \(s=0.95\) of my wages, and therefore I consumed only a limited portion of my assets. (To illustrate better my consumption-savings behavior, we could define the financial support of my parents as a wage, but I won’t)
In 2019, with my first mini-jobs, I started investing part of my liquidity, and \(r\) has finally risen. Sooner or later, I will reserve a post only to describe the composition of my portfolio, which contains essentially two ETFs, while now, I’m going to illustrate why, some months ago, I decided to buy my first Italian (inflation-linked) bond.
Motivations that made me buy BTP Italia Ot24 on 10/01/2023:
- Inflation was (and is still) rising.
- Contractionary ECB monetary policy.
101. About the product. BTP Italia Ot24 is part of the “BTP Italia” family of Italian inflation-linked bonds. Expiry date on 24/10/2024. Yearly coupon of 0.35%, paid in April and October. And, the juicy part, the revaluation of the principal, indexed to the Italian inflation by the FOI ex Tobacco ISTAT index.
1. Inflation, inflation everywhere. There is no need to tell you that, at least for the past year, we have been heavily affected by inflation (first energy and then core). Looking around on the Borsa Italiana website, I ran into this inflation-linked BTP. I started reading news and data, in particular the OECD inflation forecast. Even if at the time I had lost a good part of the inflation rise, I thought there was still space for some good revaluation, and in the end, I decided to buy it.
2. OK, il prezzo è giusto! Since July 2022, the ECB has been raising all the key interest rates. Therefore, markets had to adjust in order to offer competitive yields. This mechanism in the bond sector lowers prices. I bought at 98.295, while it was 105 on 10/01/2022, 101.87 on 11/01/2021.
When it comes to numbers, a spreadsheet is worth a thousand words. To summarize the OECD data, keep track of the FOI inflation index, inflows, and interest rates, I made this Google Sheet.
- In the Data tab, there are the OECD inflation forecasts, and the values for the Italian inflation index (FOI ex Tobacco). The basis 0.35 annual coupon is given, but to get the actual revaluation of the principal some math has to be done.
- In the Flow tab, I keep track of inflows and outflows, with the final interest rates.
In both, you can find estimations based on the OECD data.
Overall, this operation is expected to have a net Internal Rate of Return around 3.4%, and a (more general) net Return Rate of 5.9% in two years. This numbers reflect the Italian risk, and indeed all the rating agencies set their ratings around the BBB level, as of today. Although this situation may not be reassuring to some, I am happy I bought my first Italian bond.