Treasury bills, also known as BOTs, are one of the most popular and affordable forms of investment in the Italian financial landscape.
Issued by the Italian government, BOTs are short-term debt securities that offer an opportunity to invest safely and with relatively low risk. These short-term government bonds have been a staple for decades for savers seeking a safe and relatively easy-to-understand investment.
Their simplicity, coupled with their government guarantee and liquidity, makes them attractive to many savers, especially in times of market uncertainty.
In this in-depth mini-guide, we will explore what Treasury Bonds are, how they work, what the main advantages and disadvantages are, and how to invest in them.
1. What are ordinary treasury bonds?
Treasury bills (BOTs ) are short-term government bonds issued by the Ministry of Economy and Finance (MEF) and sold through auction.
These are zero-coupon securities, which means they do not pay periodic coupons, but are issued at a price below face value and redeemed at maturity at full value. The difference between the purchase price and the redemption value represents the return to the investor.
The duration of BOTs can vary, but the main denominations are 3, 6 and 12 months. Unlike BTPs (Multi-Year Treasury Bonds), which have a longer duration and pay interest in the form of coupons, BOTs are designed to meet the needs of those seeking short-term investments.
Main features:
Duration: they are issued with maturities of 3, 6 or 12 months Minimum denomination: €1,000 Redemption: always at par (100% of the nominal value) Tradability: listed on the Electronic Bond Market (MOT) Taxation: subsidized rate at 12.5% on returns
2. The issuing process
The issuance of Treasury Bills is done through competitive auctions held monthly.
The auction calendar is published by the Ministry of Economy and Finance, allowing investors to plan their investments.
Auction phases:
Announcement: publication of the announcement with quantity and characteristics of securities Order collection: intermediaries collect customer requests Auction conduct: determination of the auction price Results communication: publication of results and yield
3. How to buy a Treasury bond ?
Treasury Bills are sold through a competitive auction organized by the MEF and can be purchased directly from the public (through a bank or financial intermediary) or on the secondary market, where they are traded like any other security.
Primary Auction: The primary auction is the official channel through which the MEF issues and sells BOTs. Institutional investors, such as banks and asset management companies, participate in the auction and set the price at which they are willing to buy the bonds. Private investors can participate indirectly through their banks, which forward the order to the auction.
Purchase through primary market (Auction)
- Subscription through bank or Italian Post Office
- Submission of application a few days before the auction
- Ability to indicate the maximum purchase price
- Generally lower fees
Secondary Market: Those who did not participate in the auction or who want to buy (or sell) BOTs before their maturity can trade in the secondary market. The price in this case will vary according to market conditions, supply and demand, and current interest rates.
Secondary Market (MOT)
- Buy/sell at any time during market hours
- Price determined by market conditions
- Greater flexibility in investment management
- Possible higher fees
Click on the link below to see the list of Treasury bills available to date and their pricing:
4. The Benefits of Investing in BOTs
Investing in Treasury bonds has a number of advantages, especially for savers who prefer short-term, low-risk instruments.
Below we compile a brief list of the main benefits:
Safety: BOTs are guaranteed by the Italian state, making them one of the safest forms of investment for savers. The probability that the Italian state will not repay its debts is considered very low, though not nonexistent.
Liquidity: Being short-term securities, BOTs offer good liquidity and can be easily traded in the secondary market. This makes them particularly suitable for those who want to have the ability to quickly convert their investment into cash.
Coupon Exemption: Treasury bonds do not pay coupons and therefore do not incur periodic management costs. This aspect can be advantageous for those seeking simple investments with no intermediate maturities.
Predictable yield: With a BOT, the investor knows in advance the actual yield, given by the difference between the purchase price and redemption value. This provides an accurate forecast of earnings at maturity, which can be useful in financial planning.
Facilitated Taxation: Ordinary Treasury Bonds (BOTs) are taxed at a concessional rate of 12.5 percent on accrued interest, compared to the 26 percent rate applied to other investment instruments such as stocks, corporate bonds, and deposit accounts. This difference is due to several reasons related to the economic objectives and tax policies of the Italian state.
To optimize the investment in Treasury Bills, it is advisable:
Diversify deadlines
- Distribute investments over different maturities
- Reduce exposure to rate risk
- Maintaining flexibility
Monitor the context
- Follow the trend of interest rates
- Assess the economic outlook
- Consider investment alternatives
Planning the time horizon
- Aligning deadlines with personal goals
- Avoid early sales if possible
- Consider reinvestment at maturity
5. Disadvantages of investing in Treasury bills
Like any financial instrument, BOTs also have some disadvantages, which it is important to know in order to make informed decisions.
Low yield: One of the main disadvantages of Treasury bonds is the relatively low yield, especially during periods when interest rates are low. This makes them unattractive to those seeking investments with higher yield potential.
Influence of interest rates: BOTs are very sensitive to changes in interest rates. During periods of rising interest rates, the price of Treasury Bills in the secondary market can fall, causing a potential loss if you decide to sell them before maturity.
Country Risk: Although BOTs are considered very safe, they are still linked to the creditworthiness of the Italian state. In the event of a financial crisis or economic instability, country risk could affect the value and safety of the investment.
Brokerage costs: Despite the simplicity of the instrument, investing in BOTs involves some brokerage costs (bank fees or secondary market purchase fees) that can reduce the net return. For this reason, we always recommend that the intermediation costs of the institution chosen for purchase be thoroughly evaluated before proceeding.
6. Who should invest in ordinary Treasury bonds?
BOTs are particularly suitable for conservative investors who wish to invest in low-risk, short-term instruments and who seek stability and predictability in their portfolios.
This type of security can also be useful for those who have temporary liquidity while waiting for other long-term investment opportunities.
Nevertheless, investors seeking high returns or opportunities for capital growth might consider other options, such as equities or equity investment funds, which carry more risk but potentially offer higher returns over the long term.
Comparing Treasury Bills with other Italian government bonds, such as BTPs (Multi-Year Treasury Bonds) and CCTs (Certificates of Credit of the Treasury), a key difference emerges:
BOTs have shorter maturities and do not pay coupons. BTPs, for example, have maturities ranging from 3 to 30 years and pay periodic interest, while CCTs have floating rates and generally have maturities between 5 and 7 years.
Treasury bills are a safe, simple, and short-term investment solution. While offering generally modest returns, they are a useful tool for those seeking stability and liquidity in their portfolio. However, it is essential to carefully evaluate the costs and potential returns, as well as to take into account interest rate trends.
In a world where investment options are increasingly varied and complex, BOTs remain one of the most reassuring choices for Italian savers, particularly from the perspective of prudence and risk management.
As usual, we at BondBox always recommend that you consult with a financial advisor to choose the strategy that best suits your needs and financial goals with the goal of always protecting your assets to the best of your ability.
