BTPs or corporate bonds? How to compare yield and risk

A question many Italian savers ask: is it better to buy a BTP, an Italian government bond, or a corporate bond, issued by a company or a bank? There is no answer that works for everyone, but there is a method for comparing them correctly.

The method is the same whichever government bond you start from. The five steps below look at horizon, net yield, risk premium, rating and diversification, in that order.

The aim is not to declare a winner in general, but to make sure that when you put two bonds side by side, the difference in yield you see reflects a real difference in what you are being paid for, and not just a difference in maturity, tax treatment or name.

1. Compare over the same horizon

A 2-year BTP and a 10-year bond are not comparable: the second yields more simply because it is longer and more sensitive to interest rates. First choose the duration that suits your horizon, then compare yields within that band.

Comparing across different durations mixes two different risks, interest rate risk and credit risk, and makes it impossible to tell which one the extra yield is paying for.

2. Compare net yields

The yields shown are gross. Under Italian rules, the tax on BTPs is 12.5%, on corporate bonds 26%. Example: a BTP at 3.5% gross yields about 3.06% net; a corporate bond at 4% gross yields about 2.96% net. In this case the BTP, while yielding less gross, yields more net.

If you are taxed in another country the rates will be different, and the difference between government and corporate bonds may be smaller or absent. The principle still holds: compare what you keep, not the headline number.

3. Ask yourself how much premium you are receiving

The difference in yield between a corporate bond and a BTP of the same duration is the company's risk premium. A premium of a few tenths of a point for an issuer rated lower than Italy is rarely a good deal; a wide premium for a solid issuer deserves attention, but always ask yourself why the market demands it. The guide on credit risk explains how to read it.

4. Look at the rating, not just the name

Some large European companies have a higher rating than the Italian state: their bonds may yield less than BTPs. Others, even very well-known ones, are high yield. A familiar name is not a measure of risk.

The rating, read together with the spread, tells you far more than the brand. A company you know well as a customer may still carry a high level of debt.

Compare the rating of the company with that of the government bond you are considering: if the company is rated lower, its bond should pay a clear premium; if it is rated higher, a lower yield may be perfectly reasonable.

5. Think about diversification

A portfolio made only of BTPs depends entirely on Italy. Adding bonds from different issuers, by sector and country, reduces dependence on a single debtor. This is why 10BONDS lists show only one bond per issuer.

The same reasoning applies to any single government: a portfolio of only one country's bonds is concentrated on one debtor, however safe it is considered. The guide on European government bonds compares BTPs, OATs and Bunds.

Today's data

Compare BTPs with euro corporate bonds and with investment grade bonds in the bond finder, updated every day.

Start from the yield to maturity, keep the duration fixed and move the rating: the list shows how much extra yield each step of risk is paying.

Find your 10 bonds: set your horizon and target yield and compare governments and companies in the same list.