Fuel and electricity costs rising by more than 10 percent a year are spelling pain for consumers, even as investors in bonds that protect against inflation will probably see the best returns since 2005 persist.
South African linkers have made 9.5 percent since June, compared with the 7.2 percent average return for emerging markets linkers, according to Bank of America Merrill Lynch indices. Fixed-rate South African debt earned 5 percent.
Demand at an auction of R800 million of inflation-linked bonds on Friday was bolstered by changes to the consumer price index (CPI) announced last week. Standard Bank Group estimates this may add as much as 0.7 percentage points to the measure. The National Treasury sold linkers maturing in January 2022, January 2038 and December 2050, with investors bidding R1.68bn.
“Within our portfolios there is still space for inflation- linked bonds, particularly with these new developments around the CPI basket,” Victor Mphaphuli of Stanlib Asset Management said. “That’s positive for inflation-linked bonds.”
South Africa’s inflation rate climbed to 5.5 percent in September, from 5.2 percent a month earlier, as wage increases of more than 10 percent and rising food and fuel costs boosted prices.
The rate would have been as much as 6.2 percent using rebased data and new weightings, said Bruce Donald, a strategist at Standard Bank . That compares with 4.6 percent in October for similarly-rated Mexico, from 4.8 percent the previous month.
The weight of electricity and other fuel prices in the CPI basket has been increased to 4.2 percent of all goods from 1.9 percent, Statistics SA said last week. Petrol increases to 5.7 percent from 3.9 percent. The changes, and the rebasing to 2012 from 2008 prices, come into effect in January, it said.
The costs of electricity and other household energy sources climbed at a 9.9 percent annual pace in the year through September and are set to increase at a faster rate after Eskom applied to boost prices by 16 percent annually for five years.
“This is significant, and will likely act upwards on inflation numbers,” Donald said earlier.
Standard Bank would probably raise its estimate that inflation might peak at 6.4 percent in June or July, he said.
Bondholders expect price increases averaging 5.66 percent over the next five years, up from 5.52 percent before last week’s auction, based on the yield gap between inflation-linked and fixed-rate debt. Linkers pay interest on a principal amount that rises with consumer prices.
Inflation-linked bonds have returned 1.6 percent this quarter, while fixed-rate debt lost 0.2 percent, according to Bank of America Merrill Lynch. Yields on the government’s CPI-linked notes due in January 2022 rose 0.2 percentage point to 1.09 percent on Thursday, trimming this year’s drop 110 basis points this year.
The rally might have gone too far, said Momentum Asset Management, which in May said it was betting on linkers to outperform fixed-rate debt. Since then, the bonds returned 11 percent, according to Bank of America Merrill Lynch.
“Given the run that they have had, a lot of the appeal has been eroded. We’re not completely negative on them, but the value that we saw some months ago has come to fruition,” said Richard Klotnick of Momentum.
The cost of protecting debt against non-payment for five years using credit-default swaps was little changed at 152 on Thursday. The contracts have increased eight basis points this quarter, indicating deteriorating risk perceptions, after Moody’s Investors Service and Standard & Poor’s downgraded South Africa’s debt amid strikes that halted production at gold and platinum mines. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if the government fails to adhere to its debt agreements. – Bloomberg