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The JSE building in Sandton. (Fivepointsix/Getty Images)
Demand for South Africa’s local currency bonds is surging, driven by optimism about the country’s new broad coalition government and the prospect of interest rate cuts amid slowing inflation.
The bonds have returned 8.5% in dollar terms since the vote, the best performance so far on the Bloomberg Emerging Markets Local Government Debt Index. Turkey is the next best performer, with a return of 3.9%, compared with an average return of 0.5%.
“South African government bonds have experienced a notable rally on the back of the general election, outperforming all other emerging market local markets,” said Christian Wietoska, a strategist at Deutsche Bank.
Investors believe the presence of an opposition party could help the new government address incompetence, power shortages and logistical congestion that have hampered economic growth. Since the election, the rand has been the best-performing developing country currency, while South African stocks have hit record highs.
Non-residents have bought R12.2 billion of South African bonds since May 29, according to cleared trade data from exchange operator the JSE. That brings inflows so far this year to R22.2 billion, surpassing last year’s R16.5 billion.
South Africa’s weekly bond auctions saw a sharp increase in orders, further evidence of strong demand from foreign and local investors. The latest auction on Tuesday attracted orders worth 11.5 billion rand, more than three times the 3.75 billion rand of securities, according to data released by the central bank. It was the strongest demand in three weeks.
South Africa’s 10-year government bond yield was little changed at 11.04% on Tuesday afternoon in Johannesburg, about the lowest level since February 2023.
Farzana Bayat, fixed-income portfolio manager at Foord Asset Management in Cape Town, said the rally in South African bonds has driven yields down more than 100 basis points since the election. She said the worst-case scenario feared by investors — such as a radical left policy shift — had been avoided.
Bayat said this was also reflected in the lower cost of hedging against the threat of a default on South Africa’s debt through the purchase of credit default swaps.
“The market is pricing in a low country risk premium on bonds, which is reflected in the CDS, which has risen from 370 basis points to 300 basis points,” she said.
Meanwhile, inflation expectations for the next two years Already rejectedThis shows that the South African central bank is making progress in its efforts to control inflation. A survey released on July 5 showed that the average inflation expectations for the next two years, which the South African Reserve Bank uses to base its decisions, fell to 4.9% from 5.2% in the second quarter.
Deutsche Bank’s Vitoska said the bonds have already made significant gains, suggesting their potential for further gains may be somewhat contained.
“Overall, we believe South Africa is set for a structural shift,” he noted. “That said, we are moving our rating from overweight to moderate overweight due to elevated valuations.”
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