Treasury sells record amount of securities
The Treasury had no trouble selling a record amount of debt at its weekly fixed-rate auction on Tuesday — but it came at a cost.
Primary dealers placed orders for more than three times the amount of debt on sale, snapping up yields as much as 75 basis points higher than were available two months ago.
The country’s debt has sagged amid concern about a widening budget deficit and a populist turn in government spending ahead of the governing ANC party’s leadership elections in December.
Deputy President Cyril Ramaphosa and MP Nkosazana Dlamini-Zuma are widely regarded as frontrunners in the race to lead the party.
The sale attracted bids of R10.9bn for the R3.3bn of notes of four maturities, with clearing yields on all four bonds jumping. Securities maturing in 2044 were the most popular, with demand of four times the amount on offer.
However, the clearing yield of 10.405% was 46 basis points higher than when the notes were last sold on October 17.
Bonds due in 2031 cleared at 9.985%, up 75 basis points since the last auction of the debt on August 29.
The Treasury also sold debt maturing in 2037 and 2048.
Investors clearly felt those yields compensated them for the risk of credit downgrades, which may come as soon as next week.
They may have a point: only in Turkey and Brazil, among major emerging-market issuers, will they find higher rates. Still, a downgrade of the country’s local-currency rating to junk may lead to an exodus of investors mandated to hold investment-grade debt, sending yields even higher.
“To me, widening budget deficits and exploding debt issuance will be the triggers for more downgrades,” said Win Thin, global head of emergingmarkets strategy at Brown Brothers Harriman.
“Bond buyers are really putting themselves at risk by loading up on new issuance here,” Thin said.
The Treasury increased issuance at the weekly auction from R2.65bn to raise an additional R122bn of debt needed over the next three years to plug the widening fiscal shortfall.
The deteriorating debt trajectory threatens to trigger a downgrade of the localcurrency debt rating to junk by S&P Global Ratings and Moody’s Investors Service, both of whom are reviewing their assessments on November 24.