South Africa’s embattled Treasury had no trouble selling a record amount of debt at its weekly fixed-rate auction Tuesday — but at a cost.
Primary dealers placed orders for more than three times the amount of debt on sale, snapping up yields as much as 75 basis points higher than were available two months ago. The country’s debt has sagged amid concerns about a widening budget deficit and a populist turn in government spending ahead of the ruling African National Congress leadership elections next month.
The sale attracted bids of R10.9 billion ($758 million) for the R3.3 billion of notes of four maturities, with clearing yields on all four bonds jumping. Securities maturing in 2044 were the most popular, with demand of four times the amount on offer. The clearing yield of 10.405%, however, was 46 basis points higher than when the notes were last sold on October 17.
Bonds due 2031 cleared at 9.985%, up 75 basis points since the last auction of the debt on August 29. The Treasury also sold debt maturing in 2037 and 2048.
Investors clearly felt those yields compensated them for the risks of credit downgrades, which may come as soon as next week. They may have a point: only in Turkey and Brazil, among major emerging-market issuers, will they find higher rates. Still, a downgrade of the country’s local-currency rating to junk may see an exodus of investors mandated to hold investment-grade debt, sending yields even higher.
“To me, widening budget deficits and exploding debt issuance will be the triggers for more downgrades,” said Win Thin, global head of emerging-markets strategy at Brown Brothers Harriman & Co. “Bond buyers are really putting themselves at risk by loading up on new issuance here.”
The Treasury increased issuance at the weekly auction from R2.65 billion to raise an additional R122 billion of debt needed over the next three years to plug the widening fiscal shortfall. The deteriorating debt trajectory threatens to trigger a downgrade of the local-currency debt rating to junk by S&P Global Ratings and Moody’s Investors Service, both of whom are reviewing their assessments on November 24.
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