SA bond yields show investors shrugged off WGBI exit

Some of the highest returns in developing markets proved too much to resist for bond investors, who have largely ignored credit-ratings downgrades and deepening concern about SA’s fiscal position in the Covid-19 pandemic.

SA’s generic 10-year yields, which jumped to records above 13% on March 24 as investors fled in anticipation of Moody’s Investors Service’s review later that month and amid a global run to safe havens, fell below 10% this week for the first time in almost two months. They are still among the juiciest returns about, outdone only by Turkey among emerging markets with 12%.

Yield’s on the R2030 government bond have fallen 216 basis points, or 2.16 percentage points, since Moody’s  downgraded SA debt to junk status on March 27, meaning the country would fall out of key indices such as the FTSE Russell World Government Bond Index (WGBI). The assumption was that billions of dollars would flow out of the country as investors tracking the index, with mandates that don’t let them hold subinvestment grade, sold local bonds.

“It would appear market players were positioned short ahead of the WGBI exit expecting index trackers to reduce their SA bond exposure,” said Sasfin fixed-income trader Alvin Chawasema. “However, this did not materialise in any meaningful way post the exit as much of it had already occurred, We now have a scramble to cover those positions.”

The yield on the R2030, which moves inversely to the price, fell 34 basis points to 9.44% on Thursday while the rand had strengthened 0.78% to R18.63/$ by 5.25pm.

The outlook is not all rosy with the market still plagued by uncertainty about how the government will fund a budget deficit that could end up being double what expected when it unveiled the budget in February.

While foreigners bought a net R4.4bn in the final week of April, according to the JSE, Treasury data shows that their holding of the local market fell to 32.7% for the entire month, the lowest since January 2016. As the reweighing of the WGBI was delayed until the end of April, there is a risk they may cut exposure further in May.

“We have seen inflows, yes, but our foreign ownership is still below its peaks. What has helped is that the uncertainty about the WGBI exclusion is out of the way and SA has handled the virus outbreak better than many of its peers so far,” said Albert Botha, head of fixed income at Ashburton Investments.

With inflation set to average 3.6% in 2020, according to the central bank, SA yields at about 10% translate to attractive real returns for investors looking for relative safety. Reserve Bank governor Lesetja Kganyago said on Wednesday that risks to the inflation outlook were to the downside, opening the way for further measures to support the economy after two interest-rate cuts of 100 basis points each since March.

“When you compare where funding can be sourced and what yields you can earn, it makes sense to invest in bonds,” said Rand Merchant Bank analyst Michelle Wohlberg. “With corporate SA taking strain during lockdown, investors are looking for safe haven assets like bonds.”  

Analysts say the local bond market has also been helped by improvement in global market sentiment as more countries lift lockdown restrictions and resume economic activity and central banks move to ease the effects of Covid-19 on the economy. In the midst of the dislocation in March, the Reserve Bank stepped in and said it would buy government bonds from banks and asset managers as part of its liquidity-easing measures.

“This has been a tide that’s also lifted our boat, and we are now back to levels just before our first confirmed case,” Chawasema said.

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