Market participants expected a strong start to trading of the new Malta government stocks, but few would have expected them to surge a whopping 16% in the first day of trading! The opening trade kicked off at the intraday low of 110.55 and subsequently traded sequentially higher throughout the session, with a total of 99 regular market trades and the last price level coming in at 116.
So where does this leave us, do we sell at these levels or hold onto our bonds? In my opinion not all investor appetite has been satisfied yet and I expect continued price momentum in the short term on the back of high demand grinding yields lower. This demand is not expected to waiver for the time being, as investors scramble to get in on the action.
A trail of thought amongst investors is that if for example an investor received an allocation of EUR10,000 and would like a total exposure of EUR20,000 to the longer dated government stocks, buying an additional EUR 10,000 at the 115 level would average out the cost price of the holding to 107.50, and a yield to maturity of 2.6%; which is not essentially a bad position in terms of yield given that the 4.1% 2034 issue is yielding only just over 2%.
At a current price level of 116, and a yield to maturity of 2.2%, it would be understandable that investors may be dismayed at the poor interest return on paper; however do not forget the large amount of professional investors which have yet to aggregate sizable positions in the bonds. Also, lest we forget the big cash conveyor belt emanating from the European Central Banks bond buying program which is set to add to the demand push in price.
The economics remain favourable as the bonds remain in short supply and demand remains robust given the current interest rate and monetary environment, leading to continued expected price appreciation. Investors should seize the opportunity to add to positions from naïve offers in the short term. In my opinion, an attractive exit strategy would start to be considered around the 123-125 price level, after which the risk to reward ratio starts to become debatable, and possibly not suitable to all investors. Remember, the central bank which is historically the market maker for government stocks is only currently willing to bid for the 2040 bonds at 106, therefore should the demand dynamics eventually change there could be a significant windfall if a number of investors approach the market to sell their bonds.
What about Corporate bonds?
Yields of Malta government bonds have been falling aggressively over the last few weeks, yet we haven’t seen the same price action in the corporate bond market. As yields on government bonds grind even tighter, fixed income investors should swing their attention to any offers of corporate bonds which on average are still yielding more than 5% to maturity. Once flows into government stocks reach an equilibrium price, the corporate bond market is set to benefit from the spill over liquidity; therefore investors would do well to get invested in these instruments early.