BlackRock keeps eye on SA bonds
• Global asset manager waits for interest rate hike of 25 to 50 basis points
South African government bonds are not trading at yields high enough to pique the interest of BlackRock, the world’s largest asset manager, which is waiting for bond prices to fall before making any outright purchases of local currency bonds.
South African government bonds are not trading at yields high enough to pique the interest of BlackRock, the world’s largest asset manager, which is waiting for bond prices to fall before making any outright purchases of local currency bonds.
“We’re not taking active positions in South African government bonds until the market begins to price in a 25-to-50 basis-point hike in interest rates,” said Scott Thiel, BlackRock’s head of global bonds.
BlackRock manages global assets of $5.1-trillion, which includes fixed-income assets of $1.6-trillion. South African government bonds would be cheap at higher yields if the expectation of additional interest rate hikes was driven by political noise rather than economic fundamentals, Thiel said.
Bond yields are an indicator of future interest rate moves.
Thiel said political noise had contributed to rand weakness, which led to imported inflation and prompted expectations of interest rate hikes. But SA’s benchmark repo rate had remained unchanged at 7% since March 2016, following a three-year hiking spree in response to inflationary pressure, which saw the rate climb 250 basis points.
In SA, the market was pricing in a flat repo rate over the next 12 months, said Sandile Malinga, fixed-income manager at Prudential Investment Managers.
The search for yield among global bond investors has boded well for SA, where a combination of perceived higher risk and higher inflation has kept bond yields elevated amid record low yields in developed markets.
The yield on the benchmark R186 government bond is hovering at about 8.8%.
Demonstrating investor appetite for South African government bonds, the sovereign’s $3bn 12-year and 30-year dual tranche bond offering, issued in September 2016, drew orders of $7bn from global bond investors in 24 hours, said JP Morgan.
The issues were competitively priced relative to a 10-year offering issued earlier that year, at yields of 4.3% and 5%, respectively, said JP Morgan, a joint bookrunner for the issuance. “The transaction remains the largest Eurobond offering from a sub-Saharan African sovereign,” said Marc Hussey, joint senior country officer for SA.
BlackRock would not comment on whether it had participated in the issuance, but said it held South African government bonds via global index funds.
“SA remains the most liquid bond market in Africa, while the independence of the Treasury and Reserve Bank are key to the investment decisions taken by foreign investors,” Thiel said.
Rate hikes in the US would have a material effect on the attractiveness of emerging market bonds, said Thiel. US President Donald Trump’s planned infrastructure spend and regulatory reform was likely to lead to higher inflation and a rise in interest rates, he said.