Attractive SA bond yields make for lively government auction

Demand at the weekly government bond auction surged as investors stocked up on some of the most attractive yields in emerging markets before supply dries up into the year-end.

Investors bid for almost four times the amount of securities on offer, making it the strongest sale since the government increased the auction amount to R4.53bn on August 6, according to Bloomberg calculations based on central-bank data.

S&P Global Ratings cut the outlook on SA’s BB credit rating to negative on Friday, driving yields on benchmark 2026 securities up 13 basis points in the past two days to 8.5%, the highest in more than two weeks. Moody’s Investors Service, the only major rating company still to assess the nation at investment level, also has a negative outlook.

With only three more government auctions remaining in 2019, investors have found it hard to resist yields bettered only by Turkey, Nigeria and Lebanon among emerging-market peers.

“Bonds have been under pressure over the past two days as uncertainties regarding SA’s fiscal woes weighed,” RMB analyst Michelle Wohlberg said. “This resulted in relatively attractive levels leading into today’s auction. With limited supply in December as the Treasury stops issuing bonds after December 17, buying bonds at these yields makes sense.”

The nine primary dealers that buy government debt at the weekly fixed-rate sales placed orders for R16.6bn, half of that for the 2026 notes. Foreign investors had sold a net R4.4bn of SA bonds on Monday, the most since August 14, according to JSE data.

The Treasury increased issuance from fixed-rate debt per week from R3.3bn in August to help pay for a R138bn bailout for Eskom, the state-owned electricity utility. The ratio of government debt to GDP is expected to exceed 60% for the first time on record in 2023/2024 as tepid economic growth and administrative difficulties hinder tax collection.

Bloomberg