European government bonds: BTP, OAT and Bund explained

Governments finance themselves by issuing bonds. In the euro area the three largest markets are Italy's BTPs, France's OATs and Germany's Bunds. They are a reference point for many savers and for the market as a whole: the yields of German federal securities are the benchmark against which almost all other euro bonds are measured, and the well-known spread is the difference between the yield of the 10-year BTP and that of the German Bund with the same maturity.

Italy: how a BTP works

BTPs, Buoni del Tesoro Poliennali, are the securities with which the Italian state finances itself over the medium and long term. A classic BTP pays a fixed coupon every six months and repays its face value at maturity, which usually ranges from 3 to 30 years. It can be bought at issue, through the auctions of the Ministry of Economy and Finance, or at any time on the secondary market (Borsa Italiana's MOT) through your bank or a broker. On the market the price changes every day: that is why the yield to maturity differs from the coupon.

The family of Italian government securities

• BOT: maturity up to one year, no coupon; the return is the difference between the purchase price and the repayment.
• CTZ: short-term zero-coupon securities.
• CCT: floating coupon linked to short-term market rates.
• BTP Italia: indexed to Italian inflation (the FOI index excluding tobacco), designed for savers, with a loyalty bonus in the issues that provide for one.
• BTP Valore: reserved for individual savers during the placement period, with coupons that rise over time and a final bonus for those who hold it to maturity.

The terms of BTP Italia and BTP Valore change from one issue to the next: always read the official term sheet on the Italian Treasury Department's website before subscribing. Our tables only show fixed-coupon securities that we can compare on a like-for-like basis.

Italian taxation and other advantages

Under Italian rules, interest and capital gains on Italian government bonds are taxed at 12.5%, against 26% for corporate bonds. Government bonds are also exempt from Italian inheritance tax and, within the limits set by law, excluded from the calculation of the ISEE (the Italian means-test indicator). For the same gross yield, a BTP therefore yields more net of tax than a corporate bond for an Italian investor: take this into account when comparing.

France: how an OAT works

OATs, Obligations Assimilables du Trésor, are the medium and long-term debt securities of the French state. They are issued by the Agence France Trésor (AFT) and serve as the reference for interest rates in France: the 10-year OAT rate influences mortgages, the return of euro-denominated life insurance funds and the financing costs of companies.

A classic OAT pays a fixed coupon once a year and repays its face value at maturity, from 2 to 50 years. "Assimilable" means the AFT can reopen an existing line and issue new securities identical to the old ones, which makes OATs very liquid. Private investors buy them on the secondary market, through their bank or a broker, or indirectly through funds and life insurance.

OATi and OAT€i: inflation-linked OATs

The OATi is indexed to French inflation excluding tobacco, the OAT€i to euro-area inflation excluding tobacco. Capital and coupons are revalued with the price index: they protect against higher-than-expected inflation. Their "real" yield cannot be compared directly with the nominal yield of a classic OAT, which is why they do not appear in our tables.

The OAT-Bund spread

The gap between the yield of the OAT and that of the German Bund with the same maturity measures the premium investors demand for lending to France rather than to Germany. It widens when the market worries about French public finances or the political situation, and narrows when confidence returns.

Germany: Bunds, Bobls and Schätze

German federal securities are issued by the German Finance Agency (Finanzagentur des Bundes) and are considered the safest bonds in the euro area.

• Federal Treasury notes (Schätze): 2-year maturity.
• Federal notes (Bobl): 5-year maturity.
• Federal bonds (Bund): maturities from 7 to 30 years, the best known being the 10-year.
• Green federal securities: the proceeds go to climate and environmental projects; otherwise they have the same terms as their conventional "twins".

All pay a fixed coupon once a year and repay the face value at maturity. Private investors buy them on the exchange through a bank or broker, or indirectly through bond funds and ETFs. The 10-year Bund yield is also the starting point for spreads: the gap to Italian or French government bonds shows how the market assesses their credit risk.

The risks of government bonds

The first is interest rate risk: if rates rise, the price of bonds already issued falls, and falls more for long maturities (see the guide on duration). Anyone who sells before maturity may receive less than they paid. The yield can also be below the rate of inflation.

The second is credit risk, and here the three countries differ:

• Germany: all the major rating agencies give the federal government the top AAA rating.
• France: the credit risk of the French state is judged low by the rating agencies, but France's rating has been lowered in recent years, so OATs are not risk-free in the strict sense.
• Italy: Italy has a rating in the BBB band, that is investment grade but not among the highest in the euro area. This is why BTPs yield more than German Bunds and French OATs.

Taxation in France and Germany

For an individual resident in France, coupons and capital gains on an OAT held in a securities account are in principle subject to the single flat-rate levy (the "flat tax"), with an option for the progressive scale. Its rate has changed in recent years: check the rate in force with your bank or on impots.gouv.fr.

In Germany, interest and capital gains are subject to the flat-rate withholding tax (Abgeltungsteuer) of 25%, plus the solidarity surcharge and church tax where applicable. Investment income up to the saver's allowance (Sparer-Pauschbetrag) is tax-free if an exemption order has been filed. Have your own situation checked by your bank or a tax adviser. The yields on 10BONDS are always gross.

How to compare European government bonds

First choose the horizon that suits you, then compare the yield curves by maturity: the difference between the BTP or OAT curve and the Bund curve, maturity by maturity, is the spread. If you want more yield, compare government bonds with corporate bonds of the same duration in the bond finder. The guide government or corporate bonds? explains what changes.

Find your 10 bonds: choose the duration you need and see where BTPs, OATs and Bunds rank among the 10 bonds.