Financial analysis: Liquidity across Malta’s bond market

In an article published in mid-December 2024, I mentioned the consistent growth in the size of the corporate bond market which had increased to €2.8 billion.

I will not be going into the merits of whether one should measure the success of Malta’s bond market through the overall growth in issuance as opposed to an assessment of the credit quality of the various issuers on the market.

However, it is fair to state that the corporate bond market has truly become an important avenue as a complementary means of funding for many companies alongside other traditional forms of finance, most especially via commercial banks. Moreover, it has become increasingly evident that most retail investors in Malta have an overriding preference for fixed-income securities and, therefore, the growth of the bond market gives investors wider options than those available in the past years.

Although most Maltese investors have a general ‘buy-to-hold’ mentality since their requirement mainly surrounds the generation of a regular income stream to supplement other forms of income, especially after retirement (mainly pension income and, at times, rental income from investment property), an increasing amount of investors (especially higher-net-worth individuals) are questioning the liquidity of the bond market.

Essentially, many of the larger investors may require access to their funds prior to the maturity date of a bond and the speed at which they can exit an investment is becoming more of a determining factor for these investors.

The trading activity on the secondary market is one way of measuring the level of liquidity to enable such investors to liquidate part or all of their investment prior to maturity date if so required. Undoubtedly, given the growing size of the bond market, but also the mentality of many retail and high-net-worth investors to now shift a good portion of idle liquidity from within the banking system into the bond market following the upturn in interest rates as from the end of 2022, the trading activity improved over recent years.Last year, trading activity across the corporate bond market jumped to a record of €120 million, which is more than double the annual amount experienced until 2017. During the past five years, average annual activity across the bond market amounted to €100 million, equivalent to circa €2 million per week.

However, despite the evident increase in trading activity across several bonds (especially the larger bonds in issue), one cannot give general assurances to certain investors that a meaningful amount of bonds can be sold on any day at their prevailing market price or at a price that would be fair given the circumstances surrounding the bond market (such as movements in interest rates by the European Central Bank or expectations of future movements based on other data such as inflation rates).

The government needs to develop a well-defined strategy for Malta’s capital market with the liquidity concerns of the equity and bond markets among the foremost challenges that need to be tackled

Some investors compare this to the situation in the Malta Government Stock (MGS) market where the stockbroker of the Central Bank of Malta (CBM) publishes indicative bid prices daily and acts as a buyer of last resort if financial intermediaries place offers on the trading platform.

This role by the CBM stockbroker provides great comfort to many investors (including corporate and institutional investors) and is among the various reasons behind the popularity of the MGS market apart from Malta’s attractive credit rating and the debt dynamics of government finances. In fact, last month’s first new MGS issue for 2025 was very successful among retail investors as just under €150 million were taken up despite the very limited offer period provided by the Treasury.

In view of the growing importance of the liquidity aspect on the ultimate decision taken by an investor, and as a result of the upward movement in yields as from 2023 following the increase in interest rates across the eurozone, a growing number of Maltese investors continually assess investment opportunities across the international bond markets.

The international bond markets have a high degree of liquidity in most instances, thereby ensuring very easy access for investors wanting to acquire bonds at the outset and eventually also dispose of bonds when required. Besides, there are currently a wide pool of international sovereign and corporate bonds offering reasonable yields which have an investment-grade rating by the international credit rating agencies.

This is another reassuring aspect compared to the situation in Malta where no bonds are officially rated. Instead, unfortunately, many unsophisticated retail investors continue to be led by the false premise that secured bonds are superior to unsecured bonds.

Given the growing needs of Maltese investors, as well as recent overall developments internationally, the Maltese corporate bond market needs to be in a better position to compete with the propositions overseas to continue to attract investors’ attention.

On the aspect of the liquidity of the market, the Malta Stock Exchange (MSE) had tabled the concept of a liquidity provider programme during the first Capital Markets Roundtable event in June 2024. During a follow-up event launched by the MSE at the start of this year, the chairperson of the MSE, Joseph Portelli, indicated that discussions are taking place with the tax authorities to consider tax benefits for liquidity providers and ‘issuer market makers’.

Liquidity providers aim to minimise the difference between purchasing and selling prices by constantly adjusting bid and ask prices in response to changing market conditions, and are generally regarded as being essential players in absorbing excess supply or demand that is inevitable in securities over time. The introduction of such participants into the Maltese corporate bond market should be actively considered. Having the required liquidity mechanisms in place will instigate even great investor participation and will enable many more companies based in Malta to continue to consider the bond market as an integral part of their capital requirements.

The government needs to develop a well-defined strategy for Malta’s capital market, with the liquidity concerns of the equity and bond markets among the foremost challenges that need to be tackled. Otherwise, an increasing amount of capital flight is inevitable as investors continue to explore more liquid capital markets that are very easily available nowadays.

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