Malta Government Bond Fund

The CC Malta Government Bond Fund aims to maximise the total level of return for investors through investment, primarily, in debt securities and money market instruments issued or guaranteed by the Government of Malta.

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

November 2021

The coronavirus pandemic have, since first detected in the Capital of Hubei Province – Wuhan, dominated news headlines. It caught the world by surprise, altering life patterns and dictating economies path forward. Financial markets inevitably felt the pinch.

Efforts by central banks in the form of stimulus support, and governments, through mitigation measures to reduce the spread, vaccine coverage, and fiscal support, improved the scenario both from a health and economic perspective. However, in recent weeks a surge in coronavirus cases, possibly due to a seasonal effect which may probably contribute to a bigger outbreak, was witnessed. In fact, Europe is experiencing a surge in coronavirus infections, to levels not seen in months.

A new mutation: the Omicron variant, emerging from southern Africa, augmented fears that countries, owing to the variants’ unprecedented set of genetic mutations may once more be engulfed with infections. Conclusive findings on such emerging mutation, due to its relatively recent discovery, is thus far unavailable. That said, the repercussions, both from a health and economic viewpoint, the latter dependant on the ensuing course of action by governments to mitigate the spread and to ultimately avoid overwhelming hospitals, remain unclear. Vaccination programmes and distribution of boosters – a third dose which shall further increase immunisation against the virus, shall undoubtedly aid to mitigate the impact.

As concerns over the possible negative effect the Omicron variant may have on global economy rose, yields of European sovereigns, previously portraying an improved and thus more stable economic scenario, reversed.

While a downturn in economic data, consequent to measures imposed is plausible, the extent is at this stage unknown. Recent economic data has thus far been benevolent.

Business activity in the Euro economic area, previously appearing to have just past the peak rate of growth, headed higher in November amid an increased demand for services, which masked the second-softest increase in manufacturing production since the recovery began in July 2020. In November, Eurozone Composite Purchasing Managers Index (PMI) was revised slightly lower to 55.4 from a preliminary estimate of 55.8 and higher than the previous month’s reading of 54.2.

Eurozone inflation was estimated at 4.9 per cent in November 2021, higher than October’s actual 4.1 per cent and above economist expectations of 4.5 per cent. November’s flash reading is the highest since July 1991, further raising concerns about the ECB’s narrative that recent price spikes are seen as temporary and that the economy requires low borrowing costs. The rate of inflation sits well above the European Central Bank (ECB) target of 2.0 per cent. Month-on-month, inflation increased by 0.5 per cent, preliminary estimates showed.

European sovereign yields, previously supported by an improvement in economic activity and as the ECB President Christine Lagarde failed to push back against hawkish market bets, reversed in November. A risk-off mode due to; increased uncertainty stemming from a resurgence in coronavirus infections and eventual re-imposition of mitigation measures, and expectations that the ECB will take longer than most central banks to normalize monetary policy, drove yields of European sovereigns, lower, halting the uptick. Yield of the 10-year German Bund, closed the month 24bps lower at -0.35 per cent from -0.11 per cent at the end of October. Bond yields of sovereigns within the bloc’s periphery – those which offer a premium over Germany’s negative yielding debt, dropped at somewhat similar, yet lower pace.

Earlier in the month, ECB policymakers acknowledged that a decline in inflation, hovering close to, but below, 5 per cent may be slower than earlier anticipated, adding that the central bank must not overreact by removing stimulus too quickly.

The largest drop in sovereign yields since early March came towards the end of the month as investors sought safety after a newly-identified coronavirus variant, emerging from southern Africa and possibly resistant  to currently available vaccinations, was spreading. To mitigate the spread, several European countries announced a temporary ban on flights from South Africa and neighbouring countries. Resultant to rising concerns surrounding the possible economic impact, money market participants no longer expect an increase in the ECB deposit rate in 2022, even though the Eurozone’s inflation rate has risen to a record high in November.

In the month of November, the CC Malta Government Bond Fund registered a gain of 0.23 per cent, marginally underperforming the MSE Malta Government Stocks Total Return Index which rose by 0.29 per cent.

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.