Would You Buy a Bond Linked to Your Country’s GDP?

Imagine a sovereign bond that pays investors more when a country’s economy is doing nicely and less when gross domestic product is lagging. That’s the idea behind the GDP-linked bond, a seldom used debt instrument that is attracting increasing interest as authorities grapple with the extraordinary cost of the coronavirus pandemic.

When governments issue bonds to raise money, they pay investors a coupon typically in the form of interest at a fixed rate or tied to the inflation rate. But there’s another way: linking the coupon to economic growth. If a country’s economy grows strongly, it pays more in interest, and if it does badly, it pays less. Italy is aiming one such bond -- called “BTP Futura” -- at mom and pop investors to help finance its response to the coronavirus crisis. Interest rates will increase with time to reward savers. For those who hold the bonds to maturity, there’s a so-called “fidelity premium” tied to the nominal growth rate over the 10-year life of the bond.