The recent stream of negative economic and political news in South Africa has significantly increased the risk premium of South African bonds by 80 basis points or 0.8 percent.
If you look at where South African 10-year local bonds would normally be trading by using the US 10-year government bond and the JP Morgan Emerging Market Bond Index as valuation benchmarks, we can see the size of the risk premium being priced in.
The additional risk premium is now equal to what we saw in the days running up to the ANC elective conference in December 2017. Investors, and particularly foreign investors, are wary.
These levels offer opportunity, but for those with a slightly stronger stomach. Volatility and uncertainty are likely to remain an issue, but these high entry yields offer good value.
Not all of extra risk premium is due to South African factors.
The comments from US President Donald Trump and the current risk-off move in investment markets exacerbates any negative local news, amplifying the impact on our yield levels.
South Africa's yields are notably high against a backdrop off falling global bond yields and in many cases negative 10-year bond yields. Switzerland’s 10-year bond yield for example is -0.9 percent, France’s -0.35 percent and Germany’s -0.6 percent.
The US 10-year bond yield is 1.6 percent, which is about 0.5 percent lower than a month ago.
In the US, cautionary sentiment has led to the difference between the two-year bond yield and the 10-year bond yield, known as the yield curve, trading at the lowest levels so far this year. Historically, when this number has fallen below 0 percent, a major recession has followed. It is just below 0.09 percent.
We see further signs of growth and recession fears in the continued rally in the gold price and the fall in the copper price.
Albert Botha is the head of fixed-income portfolio management at Ashburton Investments.