Treasury’s weekly bond auction oversubscribed

LOCAL government bonds yesterday shrugged off fears of further sovereign downgrades as National Treasury’s weekly auction was oversubscribed, attracting bids of more than R10 billion for the R3.3bn of notes of four bonds, with foreign investors attracted by higher yields.

Treasury sold R900 million in bonds due to mature in 2048, with a clearing yield of 10.37 percent. Its 2044 bonds were sold for R850m, with a clearing yield of 10.31 percent. The 2037 securities also fetched R850m, with a clearing yield of 10.31 percent, and the 2031 bonds raked in R700m, with a clearing yield of 9.98 percent.

Reezwana Sumad, an economic analyst at Nedbank, said yesterday that despite the volatile political climate, and ahead of credit rating reviews that might warrant some riskoff, he saw foreign appetite returning as a result of the previous sell-off.

“Last week, we saw foreign appetite return to the local markets after negative local headlines and the bearish Medium-term Budget Policy Statement (MTBPS) caused a sharp sell-off. Foreign investors bought R6.5bn of South African bonds, and R1.8bn of South African equities, hence for the month to date the run rates are positive,” Sumad said.

Higher issuance

The SA Reserve Bank last week warned that against the backdrop of projected weak economic growth this year, slower-than-expected government revenue could lead to an increase in the issuance of South African government bonds.

The MTBPS revised the projected government bond issuance for 2017 upwards to about 15 percent of the fiscal deficit.

The Reserve Bank said that, under such conditions, domestic bonds might remain attractive for non-resident investors, because they are classified as high-yielding securities.

“However, from the financial stability perspective, there is a risk of a sudden stop in non-residents’ appetite for local bonds if South Africa were to be downgraded,” said the Reserve Bank.

Rating review

Both Moody’s Investors Service and S&P Global Ratings are expected to provide their credit rating review on South Africa next week.

In its last review, S&P affirmed South Africa’s longterm local-currency sovereign credit rating at an investment-grade BBB-, with a negative outlook.

In June, Moody’s downgraded South Africa’s longterm foreign- and local-currency sovereign credit ratings to Baa3 from Baa2, and assigned a negative outlook to all its long-term ratings.

Further downgrades would see the risk of South Africa’s sovereign bonds being excluded from the World Government Bond Index (WGBI). If this happens, all global bonds portfolios that are benchmarked against the WGBI could be forced to sell their holdings of South African government bonds.

South African Institute of Race Relations chief economist Ian Cruickshanks said yesterday’s record bond purchase did not mean there was suddenly a lot of enthusiasm for the country’s bonds.

“What this means is that investors were generally spreading their bids. People were coming in at a far higher weight and saying, ‘If the return rate on the bonds yesterday was 9 percent and today I can get them at 10 percent, I will take them in bigger quantity’,” Cruickshanks said.