Malta Government Bond Fund

The Fund aims to maximise the total level of return for investors through investment, primarily, in debt securities and money market instruments issued by the Government of Malta. The Investment Manager may also invest directly or indirectly via eligible ETFs and/or eligible CISs) up to 15% of its assets in “Non-Maltese Assets” in debt securities and/or money market instruments issued or guaranteed by Governments of EU, EEA and OECD Member States other than Malta. The Investment Manager will not be targeting debt securities of any particular duration, coupon or credit rating.

The Fund is actively managed, not managed by reference to any index.

The Investment Manager of the CC High Income Bond Funds – EUR and USD has the duty to ensure that the underlying investments of the funds are well diversified. According to the prospectus, the investment manager has to abide by a number of investment restrictions to safeguard the value of the assets

May 2022

Introduction
Market concerns, notably; lingering key macro-economic risks stemming from the war in Ukraine, monetary policy tightening as central banks continue to grapple with inflation, and a zero-tolerance coronavirus policy leading to stringent restrictions in China – threatening demand and sustaining supply-chain related disruptions, have in May continued to pose as a block to a shift in sentiment. A risk-off mode somewhat persisted, with credit market performance proving somewhat mixed.

Market environment and performance
Forward looking indicators, notably PMI data painted a somewhat mixed picture as manufacturing, albeit revised higher from initial estimate of 54.4 to 54.6, maintained its downward trend as new orders fell for the first time since June 2020 while output growth remained sluggish. Services, albeit pointing to the second-fastest expansion since September, edged lower as new business intakes, supported by a renewed increase in new orders from overseas customers, continued to rise.  Owing to a softer service sector expansion amid signs that the post lockdown rebound was losing some strength, the Eurozone Composite PMI fell to a 4-month low of 54.8.

In May, energy and food prices continued to contribute to a rise in annual inflation; a fresh record high at 8.1 per cent, in-line with expectations and marginally higher than the previous month reading of 7.4 per cent. Core inflation, which excludes transitory or temporary price volatility, rose to 3.8 per cent. Month-on-month, inflation increased by 0.8 per cent.

European sovereign yields furthered on the strong upward trajectory witnessed in previous months, heading to the highest in years on expectations of a more aggressive tightening stance by the ECB, aiming to support the currency and taming inflation, in spite of concerns surrounding the Euro area growth outlook, cut to 2.7 per cent this year from the 4.0 per cent predicted earlier in February. Minutes from April’s ECB meeting revealed ECB policymakers’ worries over high inflation and agreement towards a gradual normalisation of monetary policy.

The yield on the 10-year German Bund, closed the month at 1.05 per cent, 12bps higher than the previous month end.  Bond yields of sovereigns within the bloc’s periphery, those which offer a premium over Germany’s negative yielding debt, moved in tandem, albeit some rising at somewhat faster pace. The yield on the benchmark 10-year Treasury closed the month 20bps lower than the previous month end, at 2.74 per cent.

Fund performance
In the month of May, the CC Malta Government Bond Fund registered a loss of 1.14 per cent, outperforming the MSE Malta Government Stocks Total Return Index which dropped 2.08 per cent over the same period.

Market and investment outlook
The Manager’s forward-looking view is to continue to play the duration play depending on market conditions. Should inflationary expectations increase, a lower duration will prove determinant for relative outperformance, as witnessed in the fund’s performance on a year-to-date basis.