South African Bonds Back in Favor, Defying Index Exclusion

JOHANNESBURG (Capital Markets in Africa) — Investors are piling back into South African bonds, shrugging off two credit downgrades, a yawning budget deficit and ejection from an index tracked by trillions of dollars of funds.

Bonds coming due in 2026 have clawed back all their losses for the year, while yields on 10-year securities have dropped back into single digits for the first time since March as the government attracted record bids at a weekly debt sale on Tuesday.

With the long-anticipated expulsion from the FTSE World Government Bond Index done and dusted, investors who were worried about the extent of capital outflows are now able to lock in yields that remain among the highest in emerging markets. Foreign investors sold a net 60 billion rand ($3.3 billion) this year through April 30, when the gauge was rebalanced. South Africa’s policy rate is at a record low and inflation is slowing.

“Now that the WGBI outflows are finally out of the way, investors can start trading bonds based on their fundamentals,” said Michelle Wohlberg, a trader at FirstRand Bank Ltd. in Johannesburg. Tuesday’s sale would be a “good litmus test for the demand for government bonds for the rest of the week,” she said before the auction results were announced.

Most recent buying has been concentrated at the shorter end of the curve, with the yield on the most liquid 2026 bonds declining 128 basis points in the past six trading sessions to 7.98% on Tuesday, from as high as 11.27% on March 24. Yields on longer-dated bonds have fallen at a slower rate, with the spread on 2048 securities over 2026 notes at a record 353 basis points on Tuesday.

That difference reflects investor concerns about the longer-term fiscal outlook for South Africa, which will have to increase borrowing as the budget deficit widens as the country ratchets up spending amid the coronavirus pandemic. The economy is forecast to contract 6.1% this year, according to the central bank.

“Apart from liquidity attraction particularly in uncertain times, the 2026 bond is responding to monetary-policy expectations,” said Alvin Chawasema, a trader at Sasfin Securities in Johannesburg. “The longer-end bonds are lagging on fiscal considerations.”

Still, Tuesday’s auction showed that even longer-dated debt is now in investor sights. The primary dealers placed orders of 7.2 billion rand for 1.51 billion rand of 2032 bonds, or 4.8 times the amount on sale. The 2026 securities, though, continued to garner huge appetite, with bids of 11 billion rand, while the 2030 notes attracted orders of 12.5 billion rand.

The demand is supporting the rand, which has bounced back from a record low in March. The currency strengthened 1.1% on Tuesday to 18.3823 per dollar.

Source: Bloomberg Business News