Nominal and inflation-linked bond curves are reflecting close to all-time high yields. They therefore appear to be pricing in both a high probability of a credit rating downgrade to sub-investment grade, and a disaster-type scenario that will require an IMF bailout.
In contrast, developed-market bond yields have declined significantly, as expectations of higher inflation and growth have somewhat subsided.
Our analysis indicates that the prices of local government bonds do not reflect the reality of South Africa’s fiscal position - which is more balanced than most market participants give credit for. This disconnect between price and value offers attractive risk-adjusted returns - particularly in a global context. The $5 billion (R73.5bn) South African Eurobond issuance in late September supports this view, and clearly indicates that global markets also see significant value in local debt at current levels.
Negotiable certificates of deposit, corporate credit and bank credit have performed well over the past three years. This can be attributed to the fact that absolute yields have been high relative to history, resulting in the instruments generating strong income returns. However, both absolute yields and credit spreads (the excess yield paid as a risk premium) have fallen materially, reducing the odds of achieving similar outcomes going forward.