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 2025

Introduction

In 2025, Malta’s economy sustained its growth trajectory, albeit noting a marginal slowdown in household consumption (0.8% vs. 2.5% in Q4), and government spending (0.6% vs. 2.2%). On the trade side, both exports and imports grew, yet at a slower pace. In numbers, GDP expanded by 3.0% year-on-year (annualized) in the first quarter of 2025, slowing from an upwardly revised 3.1% increase in the previous three-month period, and marking the weakest economic growth since the third quarter of 2022.

Inflationary pressures on consumers intensified, as the annual inflation rate climbed to 2.6% in April from 2.1% in March—the highest level since March 2024. This rise was largely driven by accelerated price increases in food and non-alcoholic beverages, transportation, housing and utilities, and the hospitality sector including restaurants and hotels.

Market environment and performance

The Eurozone economy expanded by 0.6% in the first quarter of 2025, twice the initially reported 0.3%, representing its strongest growth since Q3 2022. This upswing was largely propelled by Ireland’s remarkable 9.7% increase and a better-than-expected performance from Germany. Among the major economies, Spain and Germany led with growth rates of 0.6% and 0.4%, respectively. Italy grew by 0.3%, while France and the Netherlands recorded modest increases of 0.1% each.

Business activity, as portrayed by the HCOB Composite PMI reading, continued to expand for a fifth consecutive month, though the pace of growth was only marginal, the weakest since February. Manufacturing was the main driver of output, offsetting the first decline in services activity since November. Among the euro area’s four largest economies, Italy and Spain recorded solid expansions, France moved closer to stabilization, and Germany remained in contraction. New business inflows continued to decline, while job creation remained modest.

Inflation across the bloc also moderated, easing to 1.9% year-on-year in May 2025 from 2.2% in April and falling below market expectations of 2.0%, according to a preliminary estimate. This marks the first time inflation has dipped below the European Central Bank’s 2.0% target since September 2024, reinforcing expectations of a 25bps rate cut at the ECB’s upcoming June meeting.

Fund performance

The CC Malta Government Bond Fund gained 0.17% in May, reflecting the broader decline in yields across European government bonds.

Market and investment outlook

The credit market narrative that began the year – with a focus on political uncertainty and central bank policy – remained prominent into Q2. Political tensions escalated as former President Trump adopted a more aggressive stance on tariffs, though this was later moderated with a 90-day pause. Meanwhile, central bank policies diverged: the Federal Reserve kept rates steady amid persistent inflation and signs of slowing growth, while the ECB continued to ease policy, with weakening euro area growth, a sustained disinflation trend supported by a stronger euro, lower energy prices, and rising U.S. tariffs, at the backdrop of such policy decisions.

These monetary shifts led to divergence in bond markets, with European sovereign debt outperforming as yields, overall continued to tighten. Malta’s yield curve followed suit, particularly on the long end, which saw a marked decline since the end of Q1 2025.

Looking ahead, Malta’s economy is expected to remain robust through 2025. Inflation remains low despite more recent upticks, and recent tax cuts are likely to support domestic consumption. The anticipated rise in tourist arrivals heading into peak season also bodes well for continued economic momentum.

In response to these developments, we will continue adjusting the portfolio’s duration as appropriate and maintain exposure to European sovereigns, utilizing the allowable 15% allocation.