Time to buy government bonds - Stanlib
J– South African government bonds offer some of the most attractive yields globally, with limited downside risk and further tailwinds from global central banks cutting interest rates.
This is feedback from one of South Africa’s (SA) largest bond investors, Stanlib, which manages over R600 billion in assets.
Stanlib’s head of fixed income, Victor Mphaphuli, said this would be a good time for clients to consider investing in a well-managed fixed-income fund for superior returns to a money market fund.
Rates
While United States (US) Treasuries offer attractive returns, Mphaphuli said this is unlikely to last as the Federal Reserve will begin cutting rates soon.
“Inflation keeps moderating, and employment will soften enough to allow the US Federal Reserve to cut, but growth is holding up,” he said.
Therefore, to chase higher yields, investors will have to invest in Treasuries with longer maturities or look for higher yields in emerging markets.
The most attractive government bonds are South African, as the country’s bonds offer a 7.7 per cent yield in US Dollars – the highest among its emerging market peers.
Mphaphuli said this yield will only improve as central banks around the world cut rates and volatility in the bond market fades. Stanlib projects a total return from the 10-year government bond of more than 14 per cent over the next 12 months.
Attractive
Local government bonds are made even more attractive because South African debt is relatively low-risk for such a high yield, considering the country’s debt-to-GDP ratio.
“We think that investors in government bonds are being well compensated for the risks of fiscal slippage,” Mphaphuli said.
“The credit default swap markets are sending a relatively strong message about South African sovereign credit, supported by the remarkably long average maturity of the government’s debt.”
The move by the government to use R150 billion of its gold and foreign reserves account reduced the risk of fiscal slippage. Stanlib’s comments echo those of a fixed-income portfolio manager at Sanlam, James Turp, who said there is strong momentum behind local bonds in 2024.
Yields on South African bonds are likely to remain high, according to Turp, as the Reserve Bank delays cutting interest rates until after SAs general elections next year.