Foreign investors have overlooked pertinent domestic risks and rushed into rand-denominated bonds, prompting the yields on 10-year government bonds to fall to their lowest levels in almost five months on Thursday.
Global markets recovered this week as efforts to tackle the deadly coronavirus and positive news regarding US-China trade ties lifted investor sentiment.
Foreign investors, who hold about 37% of SA government bonds, were net purchasers of more than R3bn on Wednesday, pushing the yield on the 10-year government bond to levels last seen when Moody’s Investors Service lead sovereign analyst for SA, Lucie Villa, said SA would be spared a credit rating downgrade for at least another year.
“The market has discounted the bad news, but the investment theme is still negative especially regarding weak growth and SA’s fiscal situation,” portfolio manager at Futuregrowth Wikus Furstenberg said.
Government bonds are considered an important indicator of investor sentiment towards a country. The financial instruments represent loans made by an investor to the government and yields, which move inversely to prices, move to reflect investor perceptions of their potential to suffer capital losses as prices drop, or even lose money in the event of a default.
The yield on the R2030 government bond fell 2 basis points to 8.81% on Thursday evening.
Analysts say despite a potential downgrade from Moody’s, Eskom’s financial burden and SA’s strained fiscus, local bonds remain relatively attractive to investors in search of higher-yielding returns compared with its emerging-market peers.
“If you look at real rates, the 10-year is trading at just below 9%, that is a 5% real rate. If you compare that with other markets, our spreads, both dollar and local currency, stand out in terms of price,” Furstenberg said.
“[SA bonds are] very attractive for investors and for those [on] the carry trade,” Sanlam Private Wealth portfolio manager Nick Kunze said.
Both investors and Moody’s are awaiting finance minister Tito Mboweni’s budget speech in three weeks’ time. “He will be expected to deliver concrete plans to stem rising debt levels as well as convince Moody’s to maintain SA’s sovereign credit rating at investment grade,” Michael Kruger, an investment analyst at Morningstar Investment Management SA, said.
Rand Merchant Bank fixed income analyst Michelle Wohlberg said a disappointing budget speech could prompt a sell-off in local bonds and a further steepening of the bond curve amid worries that SA could lose its last investment-grade rating in March.
“Investors want to see firm steps to implement fiscal reform. If they can cut expenditure by at least R150bn, markets should react positively,” Wohlberg said.