Mboweni’s increased debt projections weaken bond market

A wider than initially expected budget deficit forecast could see the National Treasury dig deeper into the the local bond market in an effort to finance its mounting debt.

Finance minister Tito Mboweni said in the supplementary budget on Wednesday that the Treasury expects the budget deficit to be 15.7% of GDP in the 2020/2021 fiscal year, compared to its initial forecast of 6.8%.

Prior to the speech, the rand had already lost about 0.7% to R17.32/$, while the R2030 government bond yield was unchanged at 9.32%. As Mboweni finished his speech, the rand weakened further, down 0.9% to R17.35/$. The yield on the R2030 rose seven basis points (bps) to 9.39%, the highest in a week. Bond yields move inversely to their prices.

Mboweni said the Treasury expects the country’s debt to be close to R4-trillion or 81.8% of GDP by the end of this fiscal year. 

The yield spread between the 30-year and the two-year government bond has widened to 645bps from 330 at the beginning of 2020, with longer-dated bond bonds reflecting investor concerns about SA’s funding prospects. 

While yields on the 10-year government bond have come off record highs of 13% in March, they have risen by 124bs since their lowest level so far this year.

Foreigners have been reducing their exposure to the local bond market in 2020, holding 31.5% of SA debt in May — its lowest level in eight years. Foreign investors were net sellers of R1.3bn worth of local bonds in the week ended June 19 while they have sold R59bn in so far this year.

In May, the Treasury increased the size of its weekly bond auction by R1.57bn to R6.1bn in an effort to tackle SA’s budget deficit

International banking group BNP Paribas said in a note last week that it is concerned about the market’s willingness to continue to absorb additional issuance in the pipeline should the Treasury have to finance another double-digit deficit. 

While the local bond market may be the first port of call for the Treasury, Mboweni said SA plans on borrowing about $7bn (R121bn) from international finance institutions to cushion the effects of Covid-19.

[email protected]