This week the new Malta Government Stock 3% 2040 started trading; up to the time of writing, the last traded price has shot up to over 117 on the Malta Stock Exchange from its initial public offer price of 100.
No wonder this issue was heavily over-subscribed by the local retail investor. The Central Bank of Malta indicated on its website that it was willing to buy this bond at a price of 106.90. In this article it is being argued that:
1. At 117 the MGS 3% 2040 is currently trading close to fair value
2. The MGSs in general have the potential of appreciating further
3. The 15 year segment of the curve is the most attractively priced MGS at the moment
4. The Central Bank pricing for the MGS 3% 2040 is currently out of range
At 117 the MGS 3% 2040 is currently trading close to fair value
At this price, the MGS is trading at a spread of circa 160 basis points from the benchmark Bund. As a comparison Italy 5% 2040 has a spread of 167 basis points, Portugal 4.1% 2037 has a spread of 188 basis points and Spain 2040 has a spread of 150 basis points. This is indicative that this bond is trading close to its fair value as determined by supply and demand.
The above analysis is consistent across most of the yield curve and indicates that local MGS prices reflect the reality in European markets, and trade, more or less in line with similar rated European sovereigns.
The MGSs in general have the potential of appreciating further
Assuming that the reasoning above holds, then, as Quantitative Easing gathers pace yields on bonds are expected to tighten further. As the European Central Banks is committed to continue with the program at least until September 2016, this argument is reasonable.
The 15 year segment of the curve is the most attractively priced MGS at the moment
Using the same methodology, this segment has a spread over the German Benchmark of circa 160 basis points. This is slightly out of range when compared to other sovereign bonds. For example Italy 3.5% 2030 is trading at just over 134 basis points.
This indicates that this MGS should theoretically adjust by at least 30 basis points.
The Central Bank pricing for the MGS 3% 2040 is currently out of range
The Central Bank of Malta’s indicative closing price on the MGS 3% 2040 is 106.90. From what is gathered, the CBM uses an internal model to determine trading prices. The pricing on this bond appears to be currently completely detached from demand and supply dynamics. In view of this, the CBM price on this bond is expected to move in line with the rest of the yield curve.
Antoine Briffa and Mark Vella Investment Managers at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.