Bonds steady as market eyes size of Eskom bailout

The rand and local bonds held steady at one-week lows on Tuesday as investors await the budget policy statement on Wednesday.

At 5pm on Tuesday, the rand was 0.2% weaker at R14.14/$; 0.29% weaker at R16/€; and 0.7% weaker at R18.37/£. The R186 10-year bond was bid at 8.9%, 0.5% weaker than Monday’s close of 8.855%.

Both the rand and local bonds weakened sharply last week, as load-shedding and headlines around Eskom’s debt mountain gripped the market. But much of the risk posed by Eskom’s financial problems, in particular, and government overspending more generally, have now seemingly been priced into the market, analysts said.

The rand fell to a six-week low against the dollar last week as investors digested news that the government intends to split Eskom into three separate entities. The benchmark R186 government bond due in 2026 came under pressure after ratings agency Moody’s Investors Service warned that this plan could be difficult to implement.

Bonds could rally on Wednesday if there is a positive surprise in terms of bailouts for such entities, said Old Mutual Multi-Managers investment strategist Izak Odendaal. “The risks to local bonds are mainly on the fiscal side, more specifically the prospect of a big bailout for Eskom.” 

There was still uneasiness in the market as to how much Eskom will receive, and a large bailout could see bonds sold off aggressively, said Rand Merchant Bank fixed income trader Gordon Kerr.

The power utility, which is expected to report a R20bn loss for the year to end-March and is battling to service more than R400bn in debt, started load-shedding last week after a  number of generators tripped and electricity demand exceeded supply.

Moody’s Investors Service warned that the government’s plan to unbundle Eskom might not pan out due to resistance from unions and opposition parties. Moody’s said the plan was, on its own, unlikely to help the utility’s financial situation.

Moody’s noted that government support for Eskom will only be neutral for the rating outlook if measures are also taken to cut costs and stabilise Eskom’s finances.

Emerging-market risk assets have found favour so far in 2019, due to a more dovish stance from the US Federal Reserve, which has indicated it will not raise rates as quickly as previously expected.

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