Demand for variable-rate coupon bonds ‘should rise’

SOUTH African company bonds with variable-rate coupons are best to protect against interest rates that will only increase, according to Cadiz Asset Management.

The South African Reserve Bank will be blocked from lowering rates by inflation, Bronwyn Blood, a money manager at Cadiz, said on Monday. The eventual scaling back of stimulus by the US Federal Reserve also risks sending borrowing costs higher, she said.

The Bank is caught between the slowest growth since the 2009 recession on the one hand, and rising price pressures due to the weakening of the rand on the other.

The JSE credit floating index gained 6.1% this year compared with the fixed-rate gauge’s 3% decline. SA’s benchmark interest rate will stay at 5% through next year, according to the median estimate of 11 economists surveyed by Bloomberg during the week of September 20-25. Brazil’s target rate will increase to 9.75% from 9.5% in the period.

“We are at the bottom of the interest rate cycle,” said Cape Townbased Ms Blood. “Tapering would be negative for the bond market. Demand for floating-rate instruments rather than fixed-rate instruments should be greater.”

Imperial Holdings, owner of SA’s largest car dealership network, sold R1.5bn of seven-year floating-rate notes last Wednesday, paying a coupon of 175 basis points above the benchmark Johannesburg interbank agreed rate (Jibar), which was unchanged at 5.14% yesterday for a 10th day. That compares with yields of 8.2% on its fixed-rate debt due in September 2017.

The state-owned Land and Agricultural Bank issued R1bn of variable-rate securities at 125 basis points above Jibar on October 1, increasing the sale from a planned R750m after demand exceeded supply by 2.4 times.

Inflation rose to 6.4% in August, the highest level in four years, breaching the upper limit of the Bank’s 3%-6% target, the statistics agency said on September 18.

The falling rand saw petrol costs rising 9.2% over the past 12 months. SA relies on imports for 70% of its oil needs. The rand weakened 0.5% to R9.9605 per dollar as of 4.20pm in Johannesburg yesterday, extending its slide to 15% this year, the worst performer among 16 major currencies tracked by Bloomberg. Yields on government bonds due December 2026 fell one basis point, or 0.01 percentage point, to 7.92%.

SA’s economy is forecast to grow by 2% this year.

A strike at car makers cost the industry R20bn in revenue, the National Association of Automobile Manufacturers of SA reported.

Work stoppages at SA’s mines shaved 0.3 of a percentage point off economic growth in the first half of the year, according to President Jacob Zuma.