Local bonds stage recovery as investors look for bargains

South African government bonds are gradually recovering lost ground, signalling that investors are taking advantage of higher yields on offer.

Foreign investors hold the biggest share of local debt at 41%, according to National Treasury data, rendering the local market vulnerable to swings in global sentiment.

Local pension funds account for the second biggest, at 26%, with banks, insurers and other financial institutions holding the balance between them.

In the second quarter, local bonds suffered collateral damage as sentiment soured towards emerging markets, leading to higher bond yields.

Foreigners were net sellers of local bonds to the value of $5bn in the three months to end-June, according to Bloomberg News, helping to push the yield on the benchmark R186 to highs of 9.20% for the first time since December.

“The aggressive sell-off in emerging markets has created attractive entry points. The idea was always going be [that] once the dust settles on global markets, an argument can be made for local assets,” ETM Analytics market analyst Halen Bothma said.

Global markets have calmed down slightly, although trade tension is still evident

The US is scheduled on Friday to officially impose the first round of tariffs on Chinese goods worth $34bn. China has vowed to retaliate, setting the stage for a tit-for-tat trade war, with potential consequences for the world economy.

For Thursday, though, markets are likely to focus on the release of the minutes of the US Federal Reserve’s most recent meeting to get a feel for how the world’s most influential central bank perceives the trade spat.

To date, the US Fed has been confident about the US economic outlook after raising interest rates by a cumulative 50 basis points since the start of 2018, with two more increases expected by the end of the year.

Higher US rates have previously strengthened the dollar at the expense of the rand and other emerging-market currencies through bond outflows, in particular.

The rand was steady in midmorning trade, after flirting with R14/$ over the past week — the worst levels since late November.

At 10.04am, the rand was at R13.6701 to the dollar from R13.6784. It was at R15.9750 to the euro from R15.9454, and R18.0952 to the pound from R18.0967

The euro was at $1.1686 from $1.1657.

The yield on the R186 was 8.74% from 8.735% on Wednesday.