South African Yields High Enough for Risks, Some Investors Say

JOHANNESBURG (Capital Markets in Africa) – A sell-off in emerging-market assets sparked by Turkey’s currency woes have pushed yields on South African rand bonds to levels where some investors see value.

The yield on benchmark government rand bonds due December 2026 has snaked above 9 percent twice since Monday as markets also digested downbeat assessments of South Africa’s economy from Moody’s Investors Service and the South African Reserve Bank. By Friday they were higher than before Tuesday’s government bond auction, when investors placed orders for more than four times the amount on sale.

“We expect that global risk appetite will likely improve from current levels, allowing South African assets including the rand and government bonds to recover,” Zaakirah Ismail, a fixed-income strategist at Standard Bank Group Ltd., wrote in a note to clients dated Aug. 15. “And, given our belief that the rand is deeply undervalued, this could provide a buying opportunity to investors with a medium- to longer-term investment horizon.”

Standard Bank sees the yield on benchmark securities falling to 8.3 percent by year-end. The yield climbed eight basis points on Friday to 9.06 percent. South African rand debt has lost 6.2 percent for dollar investors this quarter, the worst performance after Turkey and Russia among emerging markets tracked by Bloomberg Barclays indexes.

The next test of investor appetite will be the weekly auction on Aug. 21, when the Treasury will sell 2.4 billion rand ($161 million) of securities maturing in 2026, 2035 and 2040. Demand at the Aug. 14 sale was the highest since March, suggesting investors see yields at around 9 percent as adequate compensation for the risks of holding the debt.

“It is highly likely that investors, particularly those that had missed buying opportunities, came back to the market given the elevated yields,” said Victor Mphaphuli, a fixed-income money manager at Stanlib Asset Management Ltd. “In the short term, the market does present some opportunities.”

Gordon Kerr, a trader at Rand Merchant Bank, said the 2026 yield could rally to 8.8 percent, provided the global environment improves, while strategists Neels Heyneke and Mehul Daya at Nedbank Group Ltd. see rates reaching 8.6 percent, “with a reasonable chance” of falling to 8.4 percent.

Source: Bloomberg Business News