BOT Auction Tomorrow 9 June 2023: Expected Returns and Characteristics

It is true that all investors’ attention is focused on the issue of the first BTP Valore, however, quite rightly, some saver friends have urged us not to forget that tomorrow 9 June 2023 will be held the first BOT auction of the month. As always, the appointment is reserved for the 12-month Treasury bill. It will be a new issue and therefore a new safe haven in which to put savings while also obtaining a respectable return.

And already here we imagine what some friends are thinking: we are talking about expected returns which, in the end, when we talk about zero coupon securities such as BOTs, is the only parameter that counts.

We share the approach but, as always, we believe that we cannot talk about yield hypotheses without having in mind the characteristics of the BOT that will be placed tomorrow. So let’s start from here.

BOT auction tomorrow 9 June 2023 on the closing day of the BTP Valore issue

Tomorrow 9 June is not only the day of the annual BOT auction but also the closing date of the BTP Valore issue (provided there are no surprises from the Treasury which has reserved the right to close the placement early). The convergence between the two appointments should not create any problems for the BOT auction. Maybe there could have been problems two years ago, when T-bill yields were often negative, but definitely not now.

The appeal will therefore be high.

That said, 6.5 billion 12-month BOTs will be issued. The amount is high, demonstrating the trust that the Treasury places in the issue (and the MEF doesn’t usually make a fool of it).

The BOTs that will be placed tomorrow have an expiry date of 14 June 2024 while the settlement date is 14 June of the current year. As can be seen from the profile published on the Next BOT Auction page, the duration of the security is 366 days…but isn’t the year 365?. Not 2024 which is a leap year and hence the peculiarity of tomorrow’s issue.

BOT auction tomorrow 9 June 2023: expected returns and targeting

What do we expect on the yield front from the BOT auction tomorrow 9 June 2023?

Immediate good news: the honeymoon with yields is by no means over, on the contrary. Have you heard what the latest positions have been taken by authoritative members of the BCE board and by Lagarde herself?

Il President of the Central Bank of Croatia Boris Vujcic clearly said that inflation runs the risk of picking up its pace again and that high rates are therefore a necessity while the governor specified that the EuroTower will continue to “follow a data-dependent approach to determine the appropriate level and duration of the restriction”.

So our 2023 BOT yield forecasts remain very valid. Consequently, in the context of the auction tomorrow 9 June, we expect that a yield in the range 3.5%-3.6% which implies a pricing of 96/97 euros.

A rate that can even reach 3.6% for 12 months in these times characterized by high inflation could even make one’s nose turn up (it would have been pure gold up to 2 years ago…). However, we invite you to note that if it is true that 3.6% is currently doing nothing against inflation that is running at 7.6% (May data), it is equally true that the estimates on consumer prices for the coming months are all down. The ECB target for 2024 is 2%. It is unlikely that it will be achieved but even if it were to reach 2.5%/3%, it is convenient to have a BOT in the portfolio that can yield 3.6% for 12 months. And then there is always the possibility of selling BOTs before expiry if the scenario were to evolve in the opposite direction to that considered.

As always, everything depends on the ECB’s moves and the level of interest rates that the markets have incorporated. This is what, on balance, determines the expected yield of the BOTs at auction.

Be careful because from now on every ECB board could mark the end of the season of high yields for BOTs.