SA bonds soar as SARB enters easing territory
Bonds surged, with the yield on the most-liquid government securities falling by the most in 18 years.
Investec chief economist Annabel Bishop said the spike had hastened SARB’s additional liquidity measures.
Bishop said the drop in yields, however, reflected a reduction in market uncertainty.
“The impact of SARB announcement has been to drive yields down, with the yield on South Africa’s R186 reaching 10.19percent from 11.2percent yesterday, and the yield on the R2030 reaching 11.32percent, from 12.38percent yesterday,” Bishop said.
“The reduction in South Africa’s bond yields reflects some improvement in prices, but a full retracement in South African government bond yields to pre-crisis levels of around 9percent for the R2030, and around 8percent for the R186, has not occurred yet.”
SARB said it would buy government securities across the yield curve to ease the pressure on the financial markets due to the impact of the coronavirus.
“In addition to providing liquidity and promoting the smooth functioning of domestic financial markets, this will allow the SARB to enhance its monetary policy portfolio (MPP),” SARB said.
The MPP is one of the instruments in the SARB’s toolkit for managing money market liquidity, and can be used to add or drain liquidity from the market.
SARB said the amount and maturity of the bond purchases will be at its discretion.
Anchor Capital’s chief investment officer, Nolan Wapenaar, said the assurance that the market would be functioning despite the coronavirus was comforting to investors.
But Wapenaar said the bank needed to strike a delicate balance in the process. “Unfortunately, when the SARB is buying bonds, it is quantitative easing. There are pros and cons to quantitative easing,” he said.
“One of the pros is that it pushes the yield lower, but, on the other side, what the bank is doing is pushing cash into the monetary system. There is a delicate balance, because the velocity of cash reduces, people start hoarding on cash. What you don't want is for that cash to cause inflation.”
Last week, the SARB gave commercial banks a breathing space by providing them with cheaper access to funding after cutting the repo rate by 100 basis points.
Wapenaar said the Covid-19 had resulted in a lot of selling of bonds, particularly by foreign investors, which resulted in market makers restating their balance sheets.
“The bond market has been under severe stress. The SARB tried to address this by cutting rates last week. It helped but did not get us there,” he said.
Old Mutual Investment Group portfolio manager John Orford said local equities could be expected to outperform their global counterparts, with an expected long-term return of 7percent versus 5.5percent globally.
“While we still recommend some diversification, we do see exceptional relative value in local equities and bonds. I expect 2021 to be a better year, with equities offering their best returns since the 2008 global financial crisis,” Orford said.