Bonds, rand firm on Zuma exit calls

Yields on the benchmark R186 government bond fell below the crucial 9% level on Tuesday as prices rose after slipping in early morning trade, following S&P Global Ratings’ (S&P’s) downgrade statement on Monday.

Domestic bonds strengthened in line with the rand, following trade union federation Cosatu’s call for President Jacob Zuma to resign after his cabinet reshuffle last week.

The yield on the R186 was at 8.89% in late afternoon trade, from 8.96%, which was less than expected by some analysts. It was at 8.31% in the middle of March. “We believe that junk status is probably priced into bonds, but some negative moves could follow,” said Anchor Capital’s Nolan Wapenaar.

As with the rand, the R186 lost ground earlier with the replacement of finance minister Pravin Gordhan. An exclusion from world bond indices now hangs over the sector.

Analysts said the bond market was supported as the domestic currency rating had remained unchanged at BBB-.

S&P downgraded the foreign-currency rating to junk status of BB+.

SA is part of the Citigroup World Government Bond index, a global benchmark. SA’s inclusion was based solely on local denominated currency ratings.

S&P’s decision did not yet affect SA’s eligibility in global bond indices, said Investment Solutions chief economist Lesiba Mothata. “For this to happen, Moody’s and S&P must downgrade SA into noninvestment status,” he said.

Moody’s is set to announce its decision later.

The risk was not over just yet, said TreasuryOne dealer Phillip Pearce. “Moody’s is considered the most lenient of the three major ratings agencies, but their rating is vitally important for us to remain in the

global bond indices,” he said.

Analysts point to further factors supporting local bonds, with a foreign-debt issue amounting to only 10%, or R220bn, of total debt, with the rest in rand.

The experience of recent downgrades, notably in Latin America, supported the view that ratings agencies do not drive market movements.

Capital Economics economist John Ashbourne said: “Yields on SA dollar bonds were already close to those issued by subinvestment grade economies, such as Russia.”

Brazil’s 10-year bond yields rose to more than 16% before its sovereign rating was cut to junk or Ba2 by Moody’s in February 2016. After a period of volatility, yields settled at about 12%, but have recently fallen to 10.1% as prices rose.

This was despite the fact that Brazil’s total debt of 66% of GDP was higher than SA’s 48%.

The economy also fell into a recession, which SA has been spared until now.