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Yesterday we saw the 3 percent Malta government bond maturing in 2040 close at a price of 119.03, setting yet another record high. Investors at this point may begin to question whether or not to hold onto this fantastic investment.
We are fast approaching the 120 price level, which may be a psychological exit point for many investors. It is a curious fact that most investors would set their profit targets using round numbers. Some psychologists would argue it has what to do with ‘neatness’ as the figures are easier to use in context of the profit/loss being made on the investment. A 120 level offers a yield of 1.99 percent, and hence another important psychological milestone as the yield drops below 2%.
Aside from the psychological aspect, there is purpose and reasoning as to why the prices of the whole series of government stocks along the yield curve have risen so much, and I dare say will most likely continue rising in the near future; just look at the bonds of what deeper and more liquid markets like Germany, France and Italy are doing! France and Germany’s bonds are yielding 0.61% and 0.99% respectively and lower rated countries like Italy and Portugal are yielding 2.04% and 2.4%.
One of the most revolutionary things that have happened on the local bond market since talk about QE began and its subsequent implementation is that we have seen a transformation to a more sophisticated market, and subsequently pricing. It seems that long gone are the days where the typical investor is simply waiting for the central bank to issue its’ indicative bid price which dictates the market price (as typically the central bank was the market maker).
The QE program has breathed new life into the bond market by attracting purposeful bidders which has seen the yield curve of Malta shift lower month after month, and in many cases below what is indicated by the central bank. The biggest evidence of this is the latest bond issue by the central bank, where the market completely disregarded what the central bank priced the initial offering at, and bid the bond continuously higher. The huge windfall which has resulted in a 20% price discrepancy must have surely left officials at the central bank scratching their heads!
Was I surprised? If you follow the recent articles published by myself and colleagues of mine over the past couple of weeks, we had been strongly advocating that the writing is on the wall, and we do not believe that the story is over. The QE program is proving to be effective in driving up prices of financial assets, and investors would do well to continue to enjoy the ride until the monetary stimulus remains in place.
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