Yield on Government Securities (Rendistato) - A Guide February 2007
CONTENTS 1. INTRODUCTION 3 2.RENDISTATO 5 2.1 COMPOSITION OF THE BASKET AND CRITERIA FOR UPDATING 5 2.2 COMPUTATION OF THE RENDISTATO 6 2.3 USE OF THE RENDISTATO 6 3. DISTRIBUTION OF DATA 8 APPENDIX 1 9 ALGORITHM FOR CALCULATING THE EFFETICE YIELD AT MATURITY OF SECURITIES IN THE RENDISTATO AND RENDIOB BASKETS 9 APPENDIX 2 11 CHRONOLOGY OF THE MAIN CHANGES MADE TO THE CALCULATION OF THE RENDISTATO AND RENDIOB 11
1. INTRODUCTION The Bank of Italy gathers and processes financial information on the secondary market in government securities and bonds in Italy. This information is used to create indicators of return and reference parameters for use by professional financial operators and individual savers. The Bank of Italy calculates daily the effective yield at maturity of a sample of fixed-rate government securities listed on the screen-based bond market (the MOT). The average yield on this sample is known as the yield on government securities or Rendistato. Until 31 December 2004, the bank also calculated and published the average effective yield at maturity on a basket of bank bonds listed on the MOT, known as the Rendiob. 1 This guide contains a full explanation of the methods of computing and distributing these indicators. Section 2 and 3 and Appendix 1 contain information about the methods of calculating the yields and the composition and updating of the basket. Section 4 describes the methods of distribution. Appendix 2 gives a chronological outline of the principal changes made in the method of calculation. 1 It was decided to stop calculating and distributing the Rendiob because it had become less significant owing to the lack of listed bank bonds eligible for inclusion in the basket and the small volume of trades. Composition of the basket and criteria for updating the Rendiob The basket used to calculate the Rendiob comprised fixed-interest bonds issued by banks that were widely traded on the MOT and had a residual maturity of more than one year. Securities with specific financial characteristics were not included, as they would have made the yield calculations dependent upon other financial assets or market performance. The composition of the basket was updated twice a year, in April and October, following an analysis of the volume of trades registered on the MOT during the periods September- February and March-August. Securities whose average daily volume of trades exceeded 21,000 Euros were selected from this group. Outside the above review dates, bonds with a residual maturity of less than one year were automatically excluded from the basket, as were, on discretion, bonds whose prices recorded unusual fluctuations or which were not traded for more than 30 days. Method of calculation The Rendiob, like the Rendistato, was based on the daily calculation of the effective yield at maturity of individual securities in the basket. The yield was computed on the basis of MOT prices. The daily Rendiob was computed as the weighted arithmetic average of the yield at maturity of all securities included in the basket; the weights of this weighted average were the floating capital of each loan. The monthly average of this parameter was calculated as the simple arithmetic average of daily data. The formula used to compute the effective yield at maturity of individual securities is explained in the Appendix. Use of the Rendiob Like the Rendistato, the Rendiob was used by market operators as the reference parameter for loans and financial indexing; some provisions of the law (Legislative Decree 466/1997, Legislative Decree 460/1997, Ministerial Decree 328/1999) also allowed its use for fiscal purposes. The time series of this indicator from 1988 to 2004 is available on the website in the section Interest Rates/Rendistato and Rendiob.
2. RENDISTATO 2.1 Composition of the basket and criteria for updating The basket used to calculate the Rendistato comprises all the Treasury Bonds (BTPs) quoted on the MOT with a residual maturity of more than one year. BTPs indexed to Euro-area inflation are excluded. BTPs are medium to long-term fixed-rate government securities, issued with five maturities: 3, 5, 10, 15 and 30 years. 2 Interest is paid by deferred sixmonthly coupons and redeemed in full at maturity. The Treasury issues BTPs using the system of marginal tenders on the price and a mechanism that excludes bids made at especially low prices. An issue of securities may be the object of second-round sales by auctioning subsequent tranches. Additional allotments after the ordinary auctions may be reserved for dealers specialising in government securities. BTPs represent the largest part of Italian government debt securities. At 31 December 2006, they accounted for approximately 64% of the total amount outstanding. The floating of BTPs on the MOT occurs on the day following the issue of the first tranche of the loan (Ministerial Decree 457/1996). The basket of securities whose yields are calculated is an listing; those with a residual maturity of less than one year are automatically excluded. The Bank of Italy reserves the right to exclude securities that are traded infrequently or are subject to unusual fluctuations. The floating capital of these securities, which is used to weight yields (see paragraph 2.2) and has been expressed in Euros since 1 January 1999, is also updated periodically. The amount is increased on the day of settlement of the securities allotted at auction, usually the second working day after the allotment date. Similarly, the floating capital of securities involved Treasury buy-backs is updated on the day of settlement, usually the third working day after the buy-back date. 2.2 Method of calculation The Rendistato is calculated on the basis of effective yield at maturity of the individual securities in the basket, computed for each day of trading on the MOT. This yield is determined on the basis of the MOT prices, sent electronically to the Bank of Italy by a company of the Sia Group on a daily basis. 2 Sometimes the maturity of BTPs is 6 or 12 months more than the standard maturity.
The official price of the MOT is the average weighted price of the entire volume of the security traded on the market during the session, net of the amount traded by cross-order (Article 4.4.9 of the Regulations governing markets organised and managed by Borsa Italiana S.p.a.). The daily Rendistato figure is the weighted arithmetic average of the yield at maturity of each security in the relevant basket. The weights are the floating capital of each security. The monthly average of the Rendistato is the simple arithmetic average of the average daily figures. The formula used to calculate the effective yield at maturity of individual securities is described in Appendix 1. 2.3 Uses of the Rendistato The Rendistato is frequently used by market operators as reference parameter for floating-rate loans. It is also widely used in interest rate swaps (for example, Rendistato against Libor +/- spread). Some provisions provide for the indicator s use in given financing operations. In particular, to calculate the reference interest rate for subsidised credit operations (Decision of the Interministerial Committee for Credit and Saving of 3 March 1994 and Decree of the Treasury Minister of 21 December 1994); to calculate the maximum interest rate on variable-rate mortgage operations by regulated local authorities, in replacement of the Rendiob (Decree 2631 of the Minister for Economy and Finance of 13 January 2005). From June 1990 to May 1999, decrees were issued by the Treasury Minister providing for its use to calculate the maximum annual global cost of finance to local bodies, both fixed-rate and variable-rate. Loans of this type arranged during this period are still tied to the Rendistato. 3. DISTRIBUTION OF DATA The daily Rendistato data are distributed weekly, usually on Monday, through the Reuters circuit (BITR page). The monthly data, which are also available on the Reuters circuit, are announced to the market in a Bank of Italy press release, usually issued on the first working day of the month following the one to which the data refer. The monthly data are also published in the daily newspaper Il Sole 24 Ore, in the Supplement to the Statistical Bulletin of the Bank of Italy Financial Market, and on the bank s website (www.bancaditalia.it).
Since July 1998, only the gross data for the Rendistato are distributed, as the Bank of Italy no longer publishes net yields. The list of securities in each basket, including their weights, may be requested by fax from: Banca d Italia Servizio Politica Monetaria e del Cambio Divisione Prestiti Pubblici Via Nazionale, 91 00184 Rome Fax: 06/47923207
APPENDIX 1 Algorithm for calculating the effective yield at maturity of securities included in the Rendistato and Rendiob baskets The algorithm for calculating the effective yield at maturity used to compute the Rendistato and Rendiob is based on procedure for solving an equation in which the unknown variable is the effective yield, i.e. the discount rate that equalises the current value of the securities future return and its cum-coupon price. The formula used to calculate the gross effective yield of each security, starting from the first coupon detached after 7 January 1999, is the following C 1 C 2 C 3 C N +K P+DD L = ---------------- + --------------- + --------------- + + ----------- where: (1+i) (gg1/365) (1+i) (gg2/365) (1+i) (gg3/365) (1+i) (ggn/365) P = price recorded on the MOT (see paragraph 2.2 for the definition of the MOT price); DD L = gross accrued interests = C*GG A /GG B, where: C = gross coupon payable GG A = number of calendar days from date of coupon payment to settlement day, including only either first or last day GG B = number of days of duration of the coupon; i = effective yield at maturity; C1, C2. C N = gross coupons; K = nominal redemption value of the security; for bonds issued prior to 1 January 1997, the nominal redemption value is net of the withholding tax on the issue premium/discount accrued between the date of issue and the first coupon detached after 1 January 1997; gg1, gg2, ggn = difference in calendar days between the dates of payment of coupons C1, C2. C N and the settlement date. If the date of payment is not a working day in the Target calendar, the next working day in this calendar is used. The settlement date is based on the calendar for markets managed by Borsa Italiana S.p.a.
APPENDIX 2 Chronology of the main changes made to the calculation of the Rendistato and Rendiob October 1987: October 1995: January 1997: April 1998: July 1998: The basket exempt securities, which would no longer be representative when the taxation of bonds was applied to all government securities (Legislative Decree 556/1986, converted into Law 759/1986), was replaced by state securities. The new basket, which comprised, like the previous one, BTPs, bonds issued by local authorities, autonomous government agencies and public bodies, as well as exempt securities included in the previous basket, incorporated new issues subject to taxation, the yield on which was calculated net of withholding tax. The market s Rendistato indicator was calculated on this basket. Further change in the various segments of the financial market. After the distinction between banks and special credit institutes had been abolished (Legislative Decree 385/1993), the Rendim basket (average yield among realestate credit institutes) was eliminated and the securities incorporated into the Rendiob sample (average yield of industrial credit institutes), which thus represented the average yield in the banking sector. When the autonomous government agencies and public bodies were transformed into public limited companies, in accordance with Law 359/1992, the composition of the state securities segment on which the Rendistato is calculated included solely BTPs. The algorithm to calculate yields was adapted to take account of the innovations introduced by the fiscal reform of Legislative Decree 239/1996. Review of the method of updating the basket on which the Rendiob was calculated. As a result of this review, which was prompted by the growth of the market for bank bonds following the introduction of Legislative Decree 395/1993, the basket was updated every six months (see paragraph 3.1). To further standardise the features of the securities, it was decided not to include other gradually redeemable securities, but to keep those already forming part of the sample that met the trading requirements. Net yields were no longer published as a result of changes in taxation introduced with Legislative Decree 461/1997, whereby the return on securities could not be calculated objectively beforehand.
January 1999: October 1999: April 2004: January 2005: The yield algorithm was adjusted to take account of the new methods of calculation introduced in the Euro area as part of a series of initiatives at EU level for the creation of a Euro financial assets market. Conversion into Euros of the floating capital of the securities used for weighting, in accordance with the rules for the Euro conversion of government and private securities laid down in Legislative Decree 13/1998. During the regular six-monthly update, the last gradually redeemable securities were excluded from the Rendiob basket. As a result, the sample now consists solely of securities redeemable in full. Press release by the Bank of Italy announcing that the Rendiob would no longer be calculated or distributed from 1 January 2005. Cessation of the Rendiob.