Long-Term Treasury Bonds: how big is the return and how big is the risk?

News IT @it

9:30 am

6 May 2019

Long-term treasury bonds are medium to long-term debt securities issued by the Ministry of the Economy and Finance, with a deferred fixed rate coupon paid on a six month basis. Long-term treasury bonds are issued by means of a process referred to as marginal auctioning and are available in a number of expiry options ranging from 3, 5, 7,10, 15, 20, 30 or 50 years. The marginal auction is usually held twice a month:

  • during the second week of the month for 3 and 7 year treasury bonds and, based on demand expressed by the market, 15 and/or 30 year treasury bonds;
  • during the last week of the month for 5 and 10 year treasury bonds.

How to purchase long-term treasury bonds at an auction

The Treasury announces the number of long-term bonds issued before each auction, within a minimum to maximum range. What determines the price of long-term treasury bonds is the convergence of offers and demand during the auction. Savers are not authorised to take part in auctions directly, however they can avail themselves of authorised intermediaries, such as Tendercapital, for a chance to invest in common funds with a portfolio containing government bonds, like Tendercapital Bond Two Steps. It is important to note that during the auction, Treasury Bonds can be undersigned starting from a minimum nominal value of 1,000 Euros (or multiples).

(Click on the link for more descriptive and promotion information on Tendercapital Bond Two Steps.)

How to purchase long-term treasury bonds after the auction

Treasury Bonds can also be purchased on so-called secondary markets, after they have been issued. Treasury Bonds already in circulation are exchanged on these markets, which are authorised and regulated.

For example the MTS (Telematic Government Bond Market) is a secondary market reserved for authorised brokers (banks and investment firms), with a negotiable minimum of 2 million Euros.

Do long-term treasury bonds yield a profit?

Treasury bond return is in part linked to coupon flow and in part to the difference between the subscription price (if the bond is purchased at auction) or purchase price (if purchased on a secondary market) and nominal value which is repaid upon expiry. Coupon value is predetermined upon issuing and payment is deferred on a six month basis.

What are the risks of long-term treasury bonds?

It is important to remain mindful of two different scenarios when weighing up risks linked to investments in long-term treasury bond.

In the first one, the investor decides to purchase long-term treasury bonds and keep them until their expiry. The only risk for this type of saver is linked to the Department of the Treasury being able to pay the coupons and reimburse capital.

In the second scenario, the investor decides to sell the long-term treasury bonds before expiry and therefore also exposes themselves to market risks, such as unfavourable fluctuations of returns resulting in the price of long-term treasury bonds dropping below their auction price. In this case the saver suffers an equity loss.

Obviously it is important to note that the longer the bond life, the greater the number of risks for those who do not intend to hold on to their long-term treasury bonds until the end.

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