Government bond issue had 'good take-up' - Tonio Fenech

Finance Minister Tonio Fenech yesterday downplayed the fact that the Treasury's €20 million over-allotment option for two government bond issues had been dropped due to a lower than expected demand.

The Treasury received 1,408 applications worth €101 million for two issues of government bonds totalling €100 million and accepted a total nominal value of €89,793,300. The over-allotment option for an additional €20 million was consequently discarded.

"On the whole it was a good take-up even though there was a lower than expected demand. I was not surprised with the outcome since there have already been a number of bond issues from the private sector and there are more to come soon," Mr Fenech said.

"The private sector always offers better rates so this has to be kept in mind and the fact that the bond issues were held in August probably didn't help. Also, perhaps this was too big an issue to be held at one go. I certainly don't believe that this was a question of a lack of liquidity in the market," he said.

Mr Fenech explained that the applications worth slightly over €11 million rejected by the Treasury represented bids by institutions which were asking for a better rate of interest. These offers were not acceptable to the Treasury, he said.

The Treasury said that all subscriptions by the public, amounting to €22,943,300 in the two stocks would be accepted in full, while the offers by the institutional investors would be allotted in the order of the bid price offered.

Joe Bonello, a founder member of the Malta Stock Exchange, said investors should draw very clear demarcation lines between the security provided by government bonds/debt and corporate bonds.

"It is very relevant for investors to be aware that as things stand, the only listed securities that have a market maker are Maltese government bonds. In other words the Central Bank's stockbrokers' sole function is to guarantee a price and liquidity for the purchase or sale of any Maltese government bonds," Mr Bonello said.

Mr Bonello also highlighted the importance of the creation of a market maker both for corporate bonds and for equities.

Economist Edward Scicluna said the Treasury has enough experience as to when and how to approach the market with such an important bond issue.

"This includes seasonal factors which are normally factored in," he said.

"The crucial question relates to the bond price and coupon interest rate, with which the investor can evaluate its yield. Here the Treasury would have collected and produced a yield curve based on actual yields for difference years of maturation. This could be tweaked one way or the other depending on the current market sentiment," Prof. Scicluna said.

He added: "What we perceive as 'relatively disappointing results' must have accrued due to a misreading of market sentiment on behalf of the Treasury. The market seems to be expecting wider spreads or risk premiums than the ones judged adequate by the Treasury.

"The market would have cleared at a price. This time that price was deemed too high for the Treasury to pay for amounts exceeding the €90 million," he said.

Prof. Scicluna said the sentiment points to two possible causes, higher risk and high inflationary expectations.

"This is happening also in other eurozone members. The yield on bonds sold by the PIGS - Portugal, Italy Greece and Spain varies between one and 2.6 percentage points over and above a 10 year German bund yield of about 3.3 per cent. So far Malta's spreads were not as noticeable, but unless the government is seen to rein its deficit and public debt, further wider spreads are to be expected by the market and accepted by the government," he said.

The Treasury bonds are being offered for redemption in 2013 at a 3.6 per cent interest rate or in 2021 at five per cent. Melita, Corinthia, Mizzi Organisation and the Island Group are among companies expected to issue new bonds from next month.