Robert Brand
Finance Minister Pravin Gordhan is getting help from the Bank of Japan (BoJ) as he pushes to extend the average maturity of South Africa’s debt to reduce shorter-term funding requirements.
Longer-dated debt has outperformed short-term paper since April 4, when BoJ governor Haruhiko Kuroda surprised investors by doubling monthly bond purchases. The yield difference between two-year and 10-year rand notes has narrowed 25 basis points to 125 basis points, the lowest since September 2011. The spread for Turkey has declined six basis points in the same period to 90 basis points.
The narrowing spread, which represents the premium South Africa pays for longer-term borrowing, means Gordhan’s debt costs are falling even as he floods the market with long-term bonds, inflation accelerates and a burgeoning current account deficit threatens to drive the rand weaker.
The rally may continue as developed economies including the US and Europe maintain their near-zero interest rates to spur growth.
“The BoJ was a game changer,” Andrew Canter, the chief investment officer at Futuregrowth Asset Management in Cape Town, said on Tuesday. “It seems to mean that international investors will keep buying South African bonds even with inflation rising and the current account blowing out.”
Kuroda followed in the footsteps of Federal Reserve chairman Ben Bernanke and European Central Bank chief Mario Draghi as he swung the BoJ from incremental moves to unprecedented stimulus in his first policy meeting as governor. The BoJ would double the monetary base by the end of next year through buying government bonds, the bank said.
Yields on benchmark 10-year Japanese government bonds slid to a record low 0.315 percent after the announcement, according to Japan Bond Trading, the nation’s largest interdealer debt broker. The yield dropped as much as 6.5 basis points, or 0.065 percentage points, on Tuesday to 0.575 percent, compared with 6.53 percent for South African government debt of similar maturity.
Foreign investors have bought a net R7.9 billion of South African bonds since April 4, according to JSE data. That is an average of R995 million a day, or three times the daily average this year, according to Bloomberg calculations based on the data.
Gordhan said in February the Treasury would continue with its programme of refinancing short-term debt with longer-term notes to avoid a short-term repayment crisis, extending the average maturity of the nation’s debt to 11.7 years this year, from 11.1 years last year. South Africa has R263bn of debt due in the five years up until 2018, according to Treasury data.
While quantitative easing in developed nations would support emerging market bonds, rising inflation in South Africa and a current account deficit of 6.5 percent in the fourth quarter, near a four-year high, might weigh on the rand, reducing the attraction of South Africa’s debt, said Bernd Berg, a Zurich-based strategist at Credit Suisse.
“Domestic themes will re-dominate the rand’s performance in the weeks ahead,” Berg said. “We therefore continue to be cautious on the rand and think the risk of a further correction outweighs the attraction of the yield pick-up in South African debt.”
The rand’s 7 percent drop against the dollar this year, the worst of the 16 major currencies tracked by Bloomberg after the yen, has boosted the cost of imports, such as fuel, limiting the Reserve Bank’s room to stimulate a flagging economy by lowering interest rates.
Evidence of slowing global growth would continue to boost demand for emerging market bonds as investors looked for higher yielding assets, said Benoit Anne, the London-based head of emerging markets strategy at Société Générale.
The rand slumped the most in six months on Monday after economic growth unexpectedly eased in China, the biggest purchaser of South African commodity exports including coal and iron ore.
German investor confidence fell more than economists forecast this month, a report showed on Tuesday, suggesting a recovery in Europe’s largest economy may struggle to gain momentum. Manufacturing in the New York region expanded less than projected this month, a separate report said on Monday, adding to evidence that the US economy is struggling to accelerate.
“So what should emerging market investors do under this growth environment? Buy bonds,” Anne said. “Given the robust hunt for yields triggered by the BoJ’s policy bazooka, there has been a healthy appetite for exposure to emerging market duration, and I don’t see how this will change for now.” – Bloomberg