Investors fret over relief source

With finance minister Tito Mboweni set to unveil details on Friday of the government’s plans to fund its R500bn relief stimulus package, the bond market is signalling concern about where the money will come from.

With finance minister Tito Mboweni set to unveil details on Friday of the government’s plans to fund its R500bn relief stimulus package, the bond market is signalling concern about where the money will come from.

The yield on the 10-year government bond which matures in 2030 has risen 52 basis points (bps) to 10.88% since President Cyril Ramaphosa announced the economic and social relief measures to fight Covid-19 on Tuesday. The yield on the R2030 has risen 41 bps since the SA Reserve Bank cut the repo rate by 100 bps last week in an emergency move to curb the effects of the coronavirus on the local economy. While lower interest rates tend to boost the price of bonds, concern is mounting among investors as to whether the government will need to look to the bond market to issue more debt. Bond yields move inversely to prices.

The president has said that the government will reprioritise R130bn from the budget.

However, “there is still uncertainty about how they’re going to [do] that. It means that there is a gap in the budget that needs to be filled,” said Rand Merchant Bank fixed-income analyst Michelle Wohlberg.

“There is concern about how the Covid-19 stimulus relief package will weigh on SA’s already strained fiscus and that’s been reflected in the bond market, where we have seen weakness since the announcement of the relief measures”

On Friday, Mboweni will provide details on how the R500bn will be funded and how the relief package will work.

Sasfin fixed-income trader Alvin Chawasema said that despite the prospects of SA taking an emergency package from the International Monetary Fund and the government’s plans to re-prioritise the current budget, an increase in bond issuance is inevitable.

“Whichever way they were going to fund the fiscal year for 2020/2021, chances are that issuance was always going to increase because we are already coming from a point where the economic background was weak anyway. Even before the lockdown, chances were that issuance was going to increase.”

BNP Paribas said last week considering the need for more funding for social welfare due to the Covid-19 crisis, the Treasury could increase the issuance of bonds by more than 40%.

FOREIGN HOLDINGS OF SA BONDS FELL ALMOST THREE PERCENTAGE POINTS IN MARCH TO 34%, ITS LOWEST LEVEL IN FOUR YEARS

Analysts said the delayed rebalancing of the World Government Bond Index worsened bond weakness, as SA will fall out of the index after the rebalancing at the end of April.

With SA losing its last investment-grade rating from Moody’s Investors Service last month, index trackers have been preselling. The percentage of foreign holdings of SA bonds fell almost three percentage points in March to 34%, its lowest level in four years.