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Investors buy South African bonds at record pace on Fed delay

Foreigners have bought a net R14.1bn of South African notes since the beginning of the month.

Foreign investors are buying South African bonds at the fastest pace on record in April after spurning the nation’s debt for two months.

Foreigners have bought a net R14.1bn ($1.16 billion) of South African notes since the beginning of the month, according to Johannesburg Stock Exchange data. That’s the the biggest two-week inflow on record and on course to exceed the same amount that was purchased in the whole of September 2013. Foreigners sold a net R16.4bn of the debt in the previous two months.

With yields in Europe and the US at or near record lows, investors are looking elsewhere for returns amid speculation the Federal Reserve will delay raising borrowing costs to bolster the US job market. South African bonds, which yield the most among 24 emerging markets after Brazil and Turkey, are a good bet even as power outages weigh on economic growth and workers demand pay rises above the inflation rate, according to Cadiz Asset Management Ltd.

“After two months of very poor returns and the significant sell-off in our bonds, we started looking attractive,” Jonathan Myerson, who helps manage about $2.2bn as head of fixed- income investments at Cape Town-based Cadiz, said by phone on Tuesday. “Some soft data in the US and Fed talk, which gave the market an indication that maybe the Fed rate hike will be delayed slightly just brings back the search for yield.”


Reconsider Timing


Yields on benchmark South African securities maturing in December 2026 climbed 67 basis points in February and March, reaching a 2 1/2-month high of 8% on March 13, as investors sold emerging-market assets in anticipation of rising borrowing costs in the US Since then, the yield has dropped 28 basis points as weak US jobs and retail sales data prompted investors to reconsider the timing of rate increases.

“We saw a resumption of risk appetite and we actually saw a lot of that flow return back to emerging markets,” Mohammed Nalla, head of strategic research at Nedbank Ltd., said by phone from Johannesburg on Tuesday. “There’s still this global search for yield because the market anticipates rates are going to probably stay lower than they had anticipated for a little bit longer.”

Yields on the 2026 rand bond dropped eight basis points to 7.72% by 5 p.m. in Johannesburg on Tuesday. The rand gained 1.4% to 11.9774 per dollar.


Price Increases


The South African Reserve Bank has left its policy rate unchanged at 5.75% since July to support growth in Africa’s most industrialized economy, even as Governor Lesetja Kganyago warned last month that rising gasoline prices and above-inflation wage demands by government workers could fuel consumer price increases.

Power rationing by Eskom Holdings SOC Ltd., South Africa’s state-owned electricity utility, will probably restrict economic growth to 2% this year, in line with the government’s forecast, the World Bank said on April 13. The economy expanded 1.5% last year, the slowest pace since the 20009 recession.

Still, investors are more focused on international rates remaining low than South Africa’s power shortages or labor strife, Cadiz’s Myerson said.

“In this global environment that becomes secondary,” he said. “Any indication that Fed rate hikes are not as imminent as they were considered to be only a month ago” makes South African bonds relatively good value, he said.

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