Bond investors anticipate downgrade
INVESTORS are demanding higher interest rates from the government, anticipating a downgrade of SA’s local currency credit rating later this year.
The Tuesday government bond auction, which took place a week after Finance Minister Malusi Gigaba’s medium-term budget policy statement, was oversubscribed, but the yield on two of the bonds offered shot up between 19 and 28 basis points to 10.09% and 10.05%.
Wayne McCurrie, senior portfolio manager at Ashburton Investments, said the market was pencilling in a downgrade of SA’s debt.
“Our [interest] rates are above other markets that are already [rated as] junk,” he said.
Brazil’s 30-year US dollar bond was trading at 5.509% on Tuesday afternoon. Its benchmark 10year local currency bond carried a higher interest rate of 8.959%.
Major ratings agencies S&P Global, Moody’s and Fitch rate Brazil’s debt as junk.
The Treasury did not respond to questions about SA’s higher interest rates on Tuesday.
The government received R10.5-billion in bids on the day, compared with R2.7-billion offered for the debt due to be repaid in 15 to 31 years.
“[This was a] very successful auction,” McCurrie said. “The bids for stock were three-and-ahalf times the actual issues.”
He said interest rates were marginally lower than expected given “all the negatives around the budget speech”.
Dave Mohr, chief investment strategist at Old Mutual MultiManagers, said global developments had kept alive investor interest in emerging-market bonds, including SA’s.
“Low global yields have made South African bonds attractive despite our fiscal challenges,” Mohr said.
“Before the [budget speech], foreigners had been net buyers of R70-billion worth of bonds. Net selling since the speech has been about R10-billion.
“Central banks are gradually removing stimulus and as long as the pace is measured and well signalled, developed market bond yields are unlikely to jump much.”
Gigaba said the budget deficit would grow to 4.3% of GDP this fiscal year, the result of a R50.8- billion tax shortfall.
As the government needs to borrow to cover this shortfall, gross national debt would hit 60.8% of GDP by 2022, with the government spending nearly 15% of its budget servicing debt by 2021.
Portfolio manager at Electus Fund Managers Richard Hasson said the fiscal deficit and debt-toGDP ratios were worse than the market expected.
“This increases the risk of a ratings downgrade to our local currency rating, which could result in further rand weakness, which impacts the inflation outlook and the interest rate cycle.” — DDC