South Africa’s benchmark bond rallies

SOUTH Africa has plunged deeper into “junk” ratings territory and its fiscal situation is worsening but some investors are undeterred, choosing to buy its bonds cheap and pocket one of highest yield premiums offered in emerging markets.

S&P Global Ratings downgraded South Africa’s local currency debt to sub-investment grade on Friday and pushed the foreign currency debt deeper into “junk” territory, while Moody’s put the country on review for a downgrade.

Although widely expected, the downgrade by S&P sparked a temporary sell-off in bonds.

But the move had almost completely reversed by yesterday as investors “bought the dip”, with local and offshore fund managers lured by yields approaching 10 percent.

“Many managers are still looking to buy the sell-offs and any volatility because of losing investment grade,” said John Morris, a strategist at Bank of America Merrill Lynch in Johannesburg.

“But when markets calm down they’d like to sell the rallies, but that obviously depends on the strength of the rally.”

The yield on South Africa’s benchmark 2026 bond climbed more than 10 basis points in early trade yesterday following news of the S&P downgrade late on Friday.

By midday, however, it had shed 25 basis to its lowest in nearly three weeks at 9.215 percent, driven by renewed interest in the debt by investors chasing the hefty return.

The 10-year bond offers a yield well above equivalent bonds from Indonesia, Romania or Hungary that are similarly rated.

“If the external backdrop stays positive, a 9.5 percent yield is OK. I don’t think there is much downside (to bond prices) from here,” said portfolio manager at BNP Paribas, Cristiana de Alessi.

Yields on South Africa’s longer-dated bonds are even more attractive, offering yields north of 10 percent, enough for some investors to ignore the mounting fiscal and political risks that have triggered two downgrades this year by the big rating firms.

Domestic fund managers like Madisha have been underweight or scaling down their holdings of local bonds, spooked by the political turbulence that has seen President Jacob Zuma fire three finance ministers in as many years.