In this article we will look closely at the Variable Income Treasury Bonds available to households, their potentialities and risks, and compare it with other alternatives available in the market.
What Are Treasury Bonds?
Treasury bonds (TOs) are public debt securities. When you buy an OT you are lending money to a country so that it can meet your expenses or investments. As we will see later, all obligations have a set of characteristics:
- Issuer – Who borrows money;
- Possibility of transaction in the market – You can buy and sell when you want;
- Interest rate – Also called coupon rate (with reduced exceptions). It is an annual fee, although it can be paid at another interval (for example, an annual rate of 2% will represent a half-yearly rate of 1%);
- Term – Time of return of the money by the issuer to the buyer of the obligation;
- Nominal Value – It resembles the stock price. Price at which the obligation is issued.
Is It Worth It To Buy Treasury Bonds?
Buying treasury bonds is something that can make sense in a diversified investment portfolio. Of course, not all products are suitable for all investors or at all market moments, especially if we are talking about products with risk or uncertainty in yields. Thus, we suggest two rules of prudence:
- Buy only products whose potentialities and risks you know and are comfortable with;
- Do not focus the entire risk of your portfolio on a single product (ie diversify).
What is the Risk of Variable Income Treasury Bonds?
Variable Income Treasury Bonds are risky products. From the list of risks we draw attention to the following:
- Credit Risk – Whoever lends money to someone risks having someone else return the money. This is the credit risk. In order to measure the risk, it will be able to use Rating agencies (and here Portugal is not very well rated) and have some sensitivity to the political, economic and financial moment of the country.
- Market Risk – Treasury bonds are traded in a financial market. In this way, they are permeable to the price oscillations, which end up being related to the perceived credit risk referred to above. Additionally, it is a risk that depends on the sentiment of investors, which as we know has very little rationality. If you keep the bonds to maturity know that this market risk does not run.
- Interest Rate Risk – A last risk that is related to the possibility that the bonds will no longer be attractive to alternative products. Indeed, if we are talking about variable-yield bonds, this risk is diminished because if market interest rates start to rise, the yield on these bonds will be adjusted (not implying a devaluation of these bonds).
Characteristics of Variable Income Treasury Bonds May 2021
- Minimum subscription amount – € 1,000 and possibility of purchase of additional amounts in lots of € 1,000;
- Maximum Investment of € 1,000,000;
- Term – 5 years (refunded May 2021);
- Interest Rate – Euribor at 6 months + 2.20% (the minimum rate is 2.20% the same is to say that it does not admit negative Euribor);
- Where to Buy – At any branch of BPI, CGD or NovoBanco Banks.
Worth to buy?
With such low interest rate term deposits we may be tempted to buy these “closed eyes” products. However, we suggest you note the following:
- Interest Rate – The interest rate offered is potentially interesting, but keep in mind the value of the commissions that we will talk about next. Being variable rate protects the investor in the event of a rise in market interest rates;
- Stability of the Product – The State can not change the rules unilaterally , which gives greater predictability (which has not been visible in the past in the case of savings certificates, for example);
- Commissions – To buy, hold, receive interest and sell the bonds you will have to pay commissions to your bank. These commissions can be so high that they can make these products very unattractive;
- Term – Make sure you do not need the money in the next 5 years because if you need to sell before that time you will incur the market risk we spoke about earlier;
- Risk – Supposedly lending money to the state should be the least risky investment in the market … however, it is a risk in theory, especially if we consider that there is no Bond Guarantee Fund …
- Amount – If you have amounts to invest above € 50,000 maybe it will make more sense to go directly to the capital market to make your purchase …
- Diversification – By investing in these products ensure that you can diversify your risks.
Are OTs Better Than Time Deposits?
If we compare OTs with 5-year term deposits we see that these products are potentially better in terms of both risk and return. Thus, if you have the possibility to invest more than € 5,000 and for a term of 5 years, you should opt for OTs instead of time deposits.
Are OTs Better Than Savings Certificates?
The OT risk is similar to the risk of savings certificates, as the issuer is the same (the State). However, OT interest rates are more interesting than savings certificates (except in the C series but in this case the premium will only last until the end of 2016). For lower amounts and for shorter periods, savings certificates should be a more advantageous option.
Are OTs Better Than Treasury Savings Certificates More?
The OT risk is similar to the risk of savings certificates, as the issuer is the same (the State). The interest rates on its fixed component are similar in both products, and in OT they have the possibility of a rise in the future and in the CTP + the potential premium is dependent on GDP growth above certain levels. At the commissions level, CTP + are more interesting (they do not have all associated commissions). So to make your decision you will need to see what makes you more comfortable in terms of uncertainty.
And Why Not Investment Funds?
It is possible to invest in Treasury Bonds of the Portuguese State and other states through investment funds. This allows you to diversify your risk, invest in smaller amounts and have more liquidity (without harming your return). It may happen that the rate is not so attractive, but there you are also taking less risk. Always think that more risk equals more return and that you should invest for longer terms to increase the likelihood of earning money.