Treasury fears sell-off of bonds is not over yet

The outflows occurred against the backdrop of a broad sell-off in emerging market assets sparked by a stronger dollar and rising US rates, which weakened the case for high-yielding investments. They are a concern because SA depends on portfolio inflows to finance its current account deficit, which swelled to the widest in two years in the first quarter.

And while SA is caught in the wave of emerging market selling, the outflows highlight the country’s vulnerability, according to Tshepiso Moahloli, chief director for liability management at the Treasury. Weak growth, high unemployment and burgeoning fiscal and current account shortfalls make it less attractive as an investment than some of its peers.

“If investors start looking at each country specifically and we are at a stage where we have low investor confidence and business confidence, the impact can be amplified,” Moahloli told reporters in London on Friday. “Currently, it’s just a broad emerging market issue. But yes, it is a concern.”

The rand has wiped out all the gains that came with Ramaphosa’s ascent to the presidency and was 1.2% weaker at R13.6015/dollar at 5.10pm in Johannesburg on Monday.

The yield on benchmark government 2026 bonds climbed four basis points to 8.9%, after retreating in the previous three trading days from a six-month high.

Domestic demand

SA’s saving grace is a local investment community overseeing trillions of rand, as well as a large banking industry looking to shore up capital.

Demand from domestic investors has kept a lid on yields, Moahloli said.

Most selling of South African bonds in May was driven by “fast money” investors cutting long positions in the debt, Morgan Stanley said in a report dated June 21.

Index-tracking funds, by contrast, added to holdings, according to Morgan Stanley’s London-based fixed-income strategist, Min Dai.

Bloomberg