South African bonds are a buy for Cadiz amid global debt rout

There’s a limit to how high yields will go.

South African bonds, pummeled by rising inflation expectations and a global debt rout, are becoming a buy for investors including Cadiz Holdings and Atlantic Asset Management.

Yields on benchmark government securities have climbed 30 basis points in the past month as a worldwide fixed-income rout wiped $433 billion from bond markets. The yield has surged 99 basis points from a 20-month low in January, the most after Turkey out of 25 emerging-market sovereigns tracked by Bloomberg.

Expectations of a Federal Reserve rate increase this year and rising consumer prices locally that may force policy tightening by the South African Reserve Bank are already priced into bonds, said Jonathan Myerson, head of fixed-income investments at Cadiz, whose Absolute Yield Fund has beaten the benchmark index and average returns of peers for each of the past nine years, according to data compiled by Bloomberg.

“It’s at these kind of levels that bonds are starting to provide some buying opportunities,” Myerson said by phone from Cape Town on Wednesday. “I would expect bond yields to become better supported by investors.”

Unprecedented Stimulus

Losses from the worst global debt-market slump in two years deepened this week amid speculation the Fed is poised to start raising borrowing costs. There’s a limit to how high yields will go amid unprecedented stimulus from the European Central Bank, according to Michael Grobler, a fund manager at Cape-Town based Atlantic.

With the fourth-highest yields among developing nations, South African debt attracted foreign investors even as the global selloff accelerated. Non-residents bought a net R909m ($77 million) of South African bonds on May 13, bringing inflows this month to R1.4bn, according to Johannesburg Stock Exchange Data.

Rising gasoline and food prices, together with above- inflation wage demands by government workers and gold miners, have reignited price pressures in Africa’s most-industrialized economy, weighing on fixed-income investments. The yield difference between five-year fixed-rate bonds and similar maturity inflation-linked securities, a gauge of investors’ expectations for inflation over the period, climbed 1.93%age points to 6.46 from a record low in January.


‘ECB Counterforce’

The consumer inflation rate probably rose 4.6% in April, from 4% the previous month, a report may show on May 20, according to the median estimate of economists in a Bloomberg survey. The central bank’s target range is 3% to 6%.

Yields on benchmark South African government securities due December 2026 dropped 10 basis points to 8.03% by 5 p.m. on Thursday in Johannesburg. The yields may fall to 8.02% by the end of this quarter before rising to 8.31% by year-end, according to the median forecast of seven analysts in a Bloomberg survey.

“These are areas where one should start thinking about buying rather than reducing duration,” Grobler at Atlantic said by e-mail on Thursday. ECB stimulus “is likely to act as a counterforce to help offset upside pressure on rising bond yields” by removing bond supply from European markets, he said.

©2015 Bloomberg News


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