Ordinary Treasury Bills (BOTs ) are short-term Italian government bonds issued by the Ministry of Economy and Finance (MEF) to finance government needs.
They are issued through a competitive auction, a mechanism that ensures pricing based on market demand.
Theauction of Treasury Bills is a key mechanism for financing the state and determining the yield of these financial instruments. Its operation ensures transparency and efficiency, allowing investors to participate based on market dynamics.
For those looking for a short-term, safe and relatively liquid investment, BOTs are an attractive choice that should be carefully evaluated according to the economic environment and one’s financial goals.In this in-depth discussion, we will look in detail at how theBOT auction works, why they are placed this way and what implications it has for investors and the financial market.
1. What are BOTs?
Let’s refresh our memory a little bit, although within our academy we have extensively covered the topic of Treasury bills in this article. BOTs are coupon-free (zero-coupon) government bonds with a maturity of less than one year.
The main maturities are 3, 6 and 12 months. Their yield is the difference between the issue (or purchase) price and the par value redeemed at maturity.
The issuance of BOTs allows the Treasury to raise short-term liquidity to meet the state’s budgetary needs. For investors, these instruments represent a low-risk option, given the government guarantee and the short duration of the investment.
2. Why are BOTs placed through auction?
Auction placement is a transparent and efficient mechanism for determining the price of BOTs. This method allows the Treasury to raise funds on market terms, avoiding distortions and ensuring that the yield is determined by supply and demand.
By using the auction, the MEF can obtain the best possible price for the bonds issued, reducing the government’s financing costs. In addition, the auction mechanism ensures that institutional and private investors can compete equally for the purchase of securities.
3. How does the BOT auction work?
TheBOT auction is conducted in a well-defined manner, involving various players and following precise timelines.
1. Auction announcement
The MEF announces in advance the amount of BOTs it intends to issue, the maturity of the bonds, and how to participate in the auction. The announcement is usually made one week before the auction date.
2. Submission of bids
The auction is reserved for authorized dealers, such as banks and financial intermediaries registered in the list of Government Securities Specialists. Private investors may participate only indirectly, through banks and brokerage firms.
Bids are submitted in terms of price and quantity, and each bidder can submit multiple proposals. The auction follows the principle of “competitive pricing,” which means that buyers must specify the price at which they are willing to purchase BOTs.
3. Assignment of titles
The allocation is made following the marginal price criterion. The MEF accepts bids starting with the highest price (thus lowest yield) until the amount bid is covered. The marginal price is the lowest of those accepted.
Those who bid at a price higher than the marginal price receive the entire quantity requested. Those who bid a price equal to the marginal price may receive only a portion of the requested securities according to an allocation coefficient.
4. Auction regulations
Allottee investors must pay in the equivalent value of the securities within two business days of the auction. The Treasury thus collects the funds raised, while investors receive the BOTs in their securities accounts.
There are two main types of auctions for BOTs:
Competitive auction: investors indicate both the amount of securities they want and the price they are willing to pay.
Non-competitive auction: investors, often institutional in nature, indicate only the desired quantity and accept the weighted average price of the competitive auction.
4. What influences the price and yield of BOTs?
BOT yield is influenced by several market factors among which we find:
Supply and demand: if the demand for BOTs is high, the price will go up and the yield will go down. Conversely, low demand will cause the price to fall and the yield to rise.
ECB monetary policy: higher interest rates make short-term securities less attractive, driving up BOT yields.
Country risk and spread: if the perception of risk related to Italy increases, investors will demand higher yields to buy government bonds.
Inflation: if inflation is high, investors will demand a higher return to compensate for the loss of purchasing power.
5. Benefits and risks of BOT investment
In a concise way we could say that as in any type of investment or capital allocation there are several advantages and disadvantages, listing them all would be complex since it depends a lot on the type of BOT, the profile of the investor and countless other factors.
Below we try to summarize and make a general focus on strengths and weaknesses:
ADVANTAGES:
Safety: being government bonds, they are considered among the least risky investments.
Liquidity: they can be easily resold in the secondary market.
No coupon: the gain is entirely given by the difference between purchase price and redemption value.
RISKS:
Interest rate risk: If rates rise, the value of BOTs in the secondary market may fall.
Reinvestment risk: because the duration is short, investors must reinvest frequently, with the risk of finding lower returns.
Country risk: in crisis situations, BOT yields may rise to offset the increased risk.
Please remember that our content is created for informational purposes only and is not intended as investment advice or suggestion. Always turn to your trusted financial advisor for investment and capital allocation advice.
