Foreign investors expected to snap up government bonds
JOHANNESBURG – The National Treasury will today issue its first government bond auction for the year, worth R4.53 billion, in a bid to shore up the fiscus ahead of the crucial Budget next month.
High yields and the country’s low inflation rate will result in foreign investors having a great appetite for South Africa’s government bonds this year, despite the looming threat of a credit-rating downgrade.
Economists said yesterday that South African bonds could see some further strength in 2020 if the country manages to avoid a Moody’s downgrade to junk status.
South African bond yields declined towards the end of last year, with the yield on the 10-year generic government bond (Govi) dropping from 9.17 percent early in December to 8.87 percent.
But in the first few days of January, yields rose somewhat to 8.98 percent for the Govi and 8.26 percent for the R186.
Foreigners purchased R7.1bn worth of South African bonds in December net of sales, while January has seen marginal net purchases of -R1.8bn.
Chantal Marx, the head of investment research at FNB Wealth and Investments, said South African bonds had experienced positive net foreign flows so far.
Marx said that, in the absence of any major shock, domestic bonds would continue to attract foreign investors due to the high yield differentials.
“South African bond yields compare favourably to developed-market bond yields. For example, the US 10-year Treasury yield is currently bid at 1.84percent, and German bonds are delivering negative yields, and the Japanese 10-year is yielding zero,” Marx said.
“Added to this, South Africa’s inflation rate is quite low, so ‘real yield’ differentials are also high. Relative to sub-investment-grade emerging-market countries, South Africa’s bond yields are slightly higher.”
Marx said this could indicate that a credit-rating downgrade was already “priced” in, adding that this would provide further comfort to foreign investors.
Moody’s placed South Africa’s credit rating on a negative outlook towards the end of last year.
A credit-rating downgrade would place upward pressure on South Africa’s money market rates and bond yields.
However, inflation has remained within the SA Reserve Bank’s target range, and dropped to 3.6 percent year-on-year in November, the lowest in nine years.
The Reserve Bank was not expected to cut the repo rate at its Monetary Policy Committee meeting this week.
A senior research analyst at FXTM, Lukman Otunuga, said investor appetite for South African debt could find support from cooling inflation.
“The possibility of lower interest rates and cooling inflation could stimulate appetite towards South Africa government bonds. However, external and domestic risks impacting the economy may blunt buying sentiment,” Otunuga said.
“The Budget speech in February will most likely impact appetite towards South African debt, especially when considering its implications for Moody’s decision on South Africa’s credit rating.”
If the rating agency downgrades South Africa to junk, it will result in Africa’s most industrialised economy losing its place in the Citigroup World Government Index. Such a development could result in large capital outflows as international investors sell South African bonds.
But Ashburton Investments, the asset management arm of the FirstRand Group, said it would be banking on government bonds and listed property to provide the best risk-adjusted returns on the local front for South African investors this year.
Nico Els, a multi-asset strategist at Ashburton Investments, said South African government bonds with 10-year yields of about 9.2 percent were likely to provide investors with a very good return.
“It’s well known that South Africa faces severe fiscal challenges ahead, but we are working on the assumption that a lot of the bad news is already priced in,” Els said.
“We are also hopeful that the February 2020 Budget will demonstrate a commitment to fiscal discipline.”