Malta’s bond market in Q4

Today marks the start of the fourth quarter of the year. Incidentally, it is also a very important day for the Maltese bond market as the Treasury will be announcing the fixed prices of the two new offerings of Malta Government Stocks (MGS).

Following the relentless strong upward movement in sovereign bond yields worldwide in recent weeks leading to a sharp decline in prices, the next few months could prove to be an eventful period for the bond market.

MGS issuance

The third MGS issue of the year will take place over the coming days with retail and institutional investors being offered a maximum of €500 million in two new MGS’s, namely the 4.30 per cent MGS 2037 (a bond with a term of just over 10 years as it will mature in March 2037) and the 4.50 per cent MGS 2041 (15 years).

The treasury has already tapped the market twice this year (in April and July) raising a total of €1 billion in new MGS’s as part of the plan for record overall issuance of €1.9 billion in 2026. As such, a further MGS issuance will undoubtedly take place in the last two months of 2026 even if one assumes that the Treasury will again successfully raise the entire €500 million during the course of next week.

In both issues earlier this year, the treasury also opted for bonds with maturities of 10 years. Following the rise in yields, it is interesting to note that in both July and April, the 10-year bonds had a coupon of 3.8 per cent. As such, the rates on these new bonds provide an additional 0.5 percentage points on the 10-year maturity at 4.30 per cent. Meanwhile, the treasury had also offered a 15-year bond in April at 4.10 per cent and a 20-year bond in July at 4.25 per cent. Likewise, the coupon of the new 15-year bond at 4.50 per cent is also higher than both long-term offerings this year reflecting the upturn in yields.

Participation by retail investors and foreign institutions will be the key factors to monitor once the statistics are issued after the closure of the offer period on 9th October. Although retail investors already subscribed for €372 million in new MGS’s this year, resident deposits across local banks continued to increase to a record of €30 billion by the end of July while interest rates on savings and fixed deposits across most retail banks remain very low indeed. One would therefore expect strong take-up once again by retail investors given the higher coupons available since many would view these as a good opportunity to lock-in returns on ‘risk-free’ bonds that were unthinkable during the long period of historically low interest rates.

Implications for corporate bond issuance

The upturn in bond yields, which is also reflected in the coupons of the MGS offerings throughout the year, has obvious implications for the corporate bond market given the spread or premium that investors generally demand when subscribing to corporate bonds in order to be compensated for the additional credit risk compared to MGS.

Despite the sharp decline in MGS prices, the same pattern was not evident in the prices of existing corporate bonds given the general mild activity on the secondary market and also the very large amounts of idle savings across the banking system which tend to absorb occasional offers across a number of bonds. Prices are generally more responsive to announcements showing difficulties in honouring one’s obligations and thereby indicating higher credit risk.

The fourth quarter of the year is generally a very busy one in terms of new issuance and in fact last year saw a record issuance of over €350 million during the last three months alone. Although the authorities do not publish an indicative issuance calendar for investors to obtain visibility on timing and size of new corporate bonds, one would expect a number of new issues in the coming weeks.

In an environment where issuers are being forced to offer more generous interest rates simply to compete with sovereign bonds (MGS’s and other foreign government bonds such as France), the temptation for retail investors to chase yield without adequate scrutiny becomes even more acute. Investors need to take the time or seek assistance to understand the business model of the issuer or guarantor in order to comprehend how the company generates the cash flows from which interest will be paid, and how sensitive those cash flows are to some adverse scenarios such as a slowdown in tourism, a softening of the property market or a further rise in interest rates. The risk factors section, which is generally lengthy and may be viewed as tedious to read by some investors, deserves a detailed review.

Update on Government finances

Another very important development in the coming weeks is the presentation of the 2027 Budget which is scheduled to take place on Monday 26th October. The Budget Document providing information on the fiscal position of the Government of Malta is an important document to review for a number of reasons, namely (i) to monitor if the budget deficit has dropped to the levels forecasted during last year’s Budget Speech, (ii) to gauge the strength of government finances at a time when there is significant attention on credit ratings and yields on government bonds especially in the light of the developments across French bonds and (iii) to understand the overall requirement for new MGS issuance in 2027 also considering the redemptions amounting to €915 million next year.

With the surge in bond yields over recent weeks and months, the high level of MGS issuance also envisaged for 2027 (at over €1.7 billion as per the 2026 Budget Speech) will undoubtedly lead to higher servicing requirements across the total level of public debt. It is an important consideration when analysing the budget allocations across various economic sectors and how the interest cost on the total debt, which is now over €12 billion, compares to the amounts earmarked across other areas.

The Budget Speech due to be delivered in just over three weeks should also be of interest to the investing community to understand whether the Government has now articulated a detailed strategic plan for the capital markets, which may include the privatisation of the MSE among a number of important initiatives, in the light of the recommendations of the EU’s Savings and Investments Union to encourage an increasing amount of investors to channel their savings into capital market instruments.

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