Bonds lose their low-risk ap­peal

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - LAURA DU PREEZ

In­vestors should be aware that the South African bond mar­ket is not as low-risk as it might once have been and could be in for fur­ther losses, ac­cord­ing to a port­fo­lio man­ager.

JP du Plessis, fixed in­come port­fo­lio man­ager at Pre­scient In­vest­ment Man­age­ment, says bonds have long been re­garded as a safe-haven in­vest­ment, but now in­vestors may need to con­sider al­ter­na­tives if they have a low ap­petite for risk.

He says bond mar­kets had sig­nif­i­cant losses this past quar­ter but the risks re­main. The SA Bond In­dex was down 2.27 per­cent (Pro­fileData).

The sen­si­tiv­ity of bonds to large losses has been in­creas­ing in the past few years be­cause yields have gone ever lower and be­cause National Trea­sury has been is­su­ing new bonds with a bias to­wards longer-dated bonds, which has grad­u­ally in­creased the du­ra­tion (pe­riod to ma­tu­rity) of the in­dex, Du Plessis says.

He says that dur­ing this past quar­ter, for­eign­ers sold South African bonds “sig­nif­i­cantly” – to the value of R10 bil­lion – af­ter the United States Fed­eral Re­serve in­di­cated it would con­sider ta­per­ing off its quan­ti­ta­tive eas­ing pro­gramme.

But, he says, for­eign­ers re­main net buy­ers of bonds for the year to date and they own bonds and eq­ui­ties worth 50 per­cent of South Africa’s gross do­mes­tic prod­uct. Du Plessis be­lieves this own­er­ship is heav­ily skewed in favour of bonds.

Cur­rently, real (af­ter-in­fla­tion) US bond yields are neg­a­tive when the long-term af­ter-in­fla­tion aver­age is closer to three per­cent.

The US 10-year bond yields are cur­rently 2.5 per­cent, while the South African 10-year bond yields are 7.65 per­cent. The dif­fer­ence in th­ese yields has at­tracted for­eign in­vestors to lo­cal bonds, but the dif­fer­ence has to be suf­fi­cient to com­pen­sate for the ad­di­tional South African govern­ment credit risk and the cur­rency risk.

If in­ter­est rates rise in the US as a re­sult of the ta­per­ing off of mone­tary stim­u­lus there, for­eign­ers could sell off their hold­ings of South African bonds even fur­ther, re­sult­ing in losses in bond port­fo­lios, he says.

Du Plessis says in­vestors are in­creas­ingly con­cerned that in­ter­na­tional rat­ings agen­cies could down­grade South Africa as a re­sult of the fall­ing rand and its bud­get and cur­rent ac­count deficits (from spend­ing ex­ceed­ing earn­ings and im­ports ex­ceed­ing ex­ports). The deficits also put more pres­sure on the rand.

The lo­cal bond mar­ket has ben­e­fited from South Africa be­ing in­cluded in the World Govern­ment Bond In­dex, and while Du Plessis be­lieves that be­ing re­moved from the in­dex is not an im­mi­nent risk, he says the risk is build­ing.

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