Big money gives SA thumbs up
IN ALL the excitement about whether US stocks will crash or resume their long-running up-trend, it is worth remembering that the bond market dwarfs its more high-profile cousin. So too in South Africa: the JSE’s sexy constituents are a nice, easy way to measure the performance of the economy, both in terms of investor sentiment and the relative strength of companies and sectors. But the real action happens in government Treasury bonds, which despite their size are more difficult to understand than a share price or earnings report.
(If you’d like your brain to fizz out your ears, get a fixed-interest boffin to explain how maturity, modified duration, running yields, mark-to-market, all-in prices, coupons and pull-to-par fit together.)
Bonds provide the state with much of its revenue, and their yields affect not only the government’s cost of servicing its debt but interest rates all the way down the line into the retail environment.
Reserve Bank governor Gill Marcus may set the official repo rate, but every day global bond traders set the terms on which the really big money changes hands.
The ratings agencies keep a keen eye on bond yields when assessing a sovereign nation’s creditworthiness, and so do those who deal in exotic derivatives such as credit default swaps (CDSs).
Few countries ever default outright on their debt obligations, but their day-to-day fiscal strength is monitored closely by CDS players and priced accordingly. Anyone who considers a capital investment will look at this country-risk monitor.
These leviathans have decreed that SA, beyond the anxieties of its citizens, is trundling along pretty well
South Africa, by these measures, is not doing badly. My dipstick research shows the R157 bond yielded 7.34% on January 31, falling to 6.73% on Thursday. Since bond prices rise as their yields fall, this would have been a substantial short-term capital gain in anyone’s book. More importantly, it reflected investor confidence in SA.
Similarly, CDS risk measures of the country have fallen. CDSs are priced in terms of their “spread” over five years: a country’s spread either widens (becomes more risky) or tightens (becomes less risky). At the end of January, South Africa’s presumed risk of default was 228. By mid-April it had tightened to 188.
We must not get carried away. SA’s rating is about the same as that for Portugal, Iceland and Kazakhstan. But still far better than Greece’s or Argentina’s.
Far removed from the hubbub that surrounds stock markets, domestic political shenanigans and other crises, is a shadowy world where colossal decisions are made. These faceless leviathans have decreed that South Africa, beyond the paranoid everyday anxieties of its citizens, is trundling along pretty well. Go figure.