For the first time ever, €100 million in government bonds issued by the Treasury recently were left with €11 million not taken up and, as a result, a €20 million over-allotment option was not exercised. Charlot Zahra spoke to three prominent analysts – Labour MEP and economics’ professor Edward Scicluna, veteran economist Karm Farrugia and financial consultant Jesmond Mizzi – about the significance of this event, especially in view of the upcoming corporate bond issues totalling €350 million in the coming months
Jesmond Mizzi: “At some stage, over saturation is bound to happen”
What is your reaction to the fact that the €100 million in bonds were not fully taken all up by the market? This is not surprising. Government has been issuing bonds too frequently of late in my opinion. At some stage, over saturation is bound to happen.
However, the amount of the bond was raised as the total collected was €101million, therefore actually it was the treasury that did not exercise the over-allotment option.
The amount was not a small one, while I think that retail investors are focusing more on corporate issues.
Is this a reflection of the low coupon offered by the government when compared to the expected corporate bonds? Yes, I think retail investors are being attracted by better yields in the corporate bond market both locally and also internationally. This however could mean one of two things: that investors are not comparing like with like or that they are prepared to take more risk.
I hope that they realise that the government and corporate bonds carry different risks and that investors are not just considering the coupon rate.
I also think that the fact that government bonds not being issued at par is a disadvantage. Retail investors do not like buying above par.
Furthermore, one must compare Government Bond yields with those of other European governments or governments with similar credit ratings. Here we compare favourably.
In your view, from where can the government can borrow the remaining shortfall if it is so desperate to borrow? From the Treasury Bill market apart from others. It is here in the Treasury Bill market that I believe government will soon have to accept bids requesting higher rates of return than previously.
Will it issue a new bond issue with a higher coupon or will it resort to borrowing from banks? Neither, I do not see any reason for alarm.
The coupon will depend on market conditions at the time, both locally and internationally. If investors become more risk averse and invest more in equities bond prices call fall and this could improve the yields offered.
With €350 million to be issued in bonds in the coming few months, do you think that there is sufficient liquidity to fund all these issues? I have no doubt in my mind that there is sufficient liquidity. The liquidity may not all be available in the bond market however.
As stated above, government may have to offer better yields in the Treasury Bill market to patch any shortfall in its requirements.
Also with bank rates as low as they are today I think investors will be attracted to future issues.
Banks are offering much lower rates on maturing bank deposits and investors are looking at alternatives. Government stocks will be attractive to these investors who want a safe investment.
From where is the expected liquidity coming from? From private investors, from corporate investors, or from both? Which will be pre-eminent in this respect? Most of the liquidity has always come from the institutions. I see no change. However retail investors are also looking for better income.
Do you think that there will be strong interest from foreign investors in these bond issues?
I do not have access to this information; however we have never seen any interest from foreign institutions.
In view of the fact that companies are bypassing banks and are self-financing by going to the public, how will this reflect on deposits at local banks? Will they suffer as a result of the bond issues and to what extent? Well, it is a fact that the issue of bonds is an alternative source of financing to bank financing.
Nonetheless, a large part of the funds raised from a bond issue will eventually find its way back into the banks so I do not see any significant change if at all on bank deposits.
Banks may feel the pinch in that they are loosing out on interest income. Nonetheless, one should not forget that it is the banks that have brought this situation upon themselves as they have had to rethink their loan facility policy in the light of the global credit crisis.
How will bank interest rates for depositors be affected as a result of the bond issues, which would generally offer better coupons? Do you think that banks will be pressured to revise their interest rates accordingly to reflect the new reality? No, I do not think that banks will need to revise their rates of interest. One should not compare interest from a short to medium-term bank account with that from a long-term bond, which is what most of the recent issues are. One must appreciate that the two carry different risks.
Karm Farrugia “There seems to be general agreement that the economy will this year contract up to 1 per cent”
What is your reaction to the fact that the €100 million in bonds were not fully taken all up by the market? I don’t think there has ever before been any government bond issue that wasn’t oversubscribed. This time the Treasury misjudged the primary bond market’s mood.
Perhaps the rate of interest should have been even just a half-of-one-percent higher.
Perhaps the ‘security’ factor associated with lendings to the government has been allowed to lose its perceived value, consequently narrowing the traditional demarcation ‘safety’ line between corporate and Treasury bonds.
One, perhaps not a very significant factor, has been – at least in the eyes of the ‘small investor ‘ – the misconception that “subordinated” – frequently found in corporate bonds adverts – means being akin to “secured”, even “guaranteed”.
In your view, from where can the government can borrow the remaining shortfall if it is so desperate to borrow? “Desperate” is an exaggeration. The government should be able to hold on for, say, another three months and then come out with a fresh issue, this time with a more sensible coupon. In the meantime, Treasury bills would oblige.
With €350 million to be issued in bonds in the coming few months, do you think that there is sufficient liquidity to fund all these issues? I believe that there is enough liquidity in the economy for the issues in the pipeline, but I am not so sure whether the coupons are going to be high enough. Wait and see.
Do you think that there will be strong interest in from foreign investors in these bond issues? I don’t believe foreign investors will be involved in the forthcoming corporate bond issues, unless of course the coupon rate is higher than anticipated or some level of “security” is included in place of “subordination”.
In view of the fact that companies are bypassing banks and are self-financing by going to the public, how will this reflect on deposits at local banks? Will they suffer as a result of the bond issues and to what extent? The banks seem to be flush with deposits. I don’t think they will be adversely affected considerably; otherwise they would have already ‘humoured’ the respective corporation-clients.
How will bank interest rates for depositors be affected as a result of the bond issues, which would generally offer better coupons? Do you think that banks will be pressured to revise their interest rates accordingly to reflect the new reality? Banks in Malta are stronger than they would appear to the casual onlooker on the economy. They are strong enough to withstand such a situation as is likely to arise from the launching of the impending corporate bond issues.
I won’t be surprised if one or two of these would encounter the same fate as the recent Treasury bond, and not because of insufficient liquidity in the economy, but rather because investors are already seeing that the “green shoots” from some EU economies are indeed real and they would rather wait awhile than take on five-year commitments or more.
Edward Scicluna “Liquidity is not a problem at all”
What is your reaction to the fact that the €100 million in bonds were not fully taken all up by the market? The only reason for this happening is that the Treasury misread the market.
This in turn depends on why the market is expecting a higher “spread”.
Looking at similar “high risk countries” such as Portugal, Italy, Greece and Spain with large budget deficits and high debt rates one finds similar larger spreads are being expected by the Euro bond market. There is no reason why Malta should be the exception.
In your view, from where can the government can borrow the remaining shortfall if it is so desperate to borrow? From the same market of course. But it has to pay a higher coupon rate, albeit reluctantly in view of the cost of servicing its debt.
What effect would the added government bond issues have on the Maltese public deficit and to what extent will it be affected? It is the other way round. It is the large deficits and increasing debt which is requiring further resort to bond issues.
With €350 million to be issued in bonds in the coming few months, do you think that there is sufficient liquidity to fund all these issues? Liquidity is not a problem at all. We are still flush with liquidity.
But obviously one would want to see these moneys invested efficiently and wisely in investment not on public current expenditure.
From where is the expected liquidity coming from? From private investors, from corporate investors, or from both? Which will be pre-eminent in this respect? The Euro Bond market is a vast market. At the right price borrowing from locals and foreign persons or institutions should not be a problem.
In view of the fact that companies are bypassing banks and are self-financing by going to the public, how will this reflect on deposits at local banks? Will they suffer as a result of the bond issues and to what extent? There should not be any problems if the local market is well informed.
This is the catch. There are many reasons why the market cannot be well informed when facing local private bond issues.
Firstly, No rating is sought for these issues. Secondly, independent advice is very difficult to come by.
This obviously is in some way penalising the Treasury which has to compete with these high coupon issues and where the market does not have the right tools to measure the expected risk and distinguish between them.
How will bank interest rates for depositors be affected as a result of the bond issues, which would generally offer better coupons? Do you think that banks will be pressured to revise their interest rates accordingly to reflect the new reality? In a free market any price change would normally have an effect on all the other prices. The money market is no exception.
