SA’s ‘junk’ bonds back in demand as high-yield lures local, foreign investors

Central bank halves purchases of government securities.
Image: Bloomberg

After selling a record R69.6 billion of South Africa’s recently downgraded bonds this year, foreign investors – faced with low to zero returns around the world – are rushing back to grab the high-yielding debt in the ailing economy.

In the last two weeks foreign investors have been net buyers of local bonds to the tune of more than R4 billion, after weeks of being net sellers.

This week Goldman Sachs said it was sticking to a “buy” recommendation on South Africa’s 10-year issue.

“We continue to favour longs in 10-year SAGBs on an FX-hedged basis given the attractive carry,” the US bank’s Kamakshya Trivedi said in a note.

Deutsche Bank and Bank of America also recommend the South African debt, with Deutsche Bank saying it preferred long-dated bonds due in 2035 and 2037.

“After the underperformance and a decline of 16.2 percentage points in foreign holdings since YTD, R186 (2026 bond) is also becoming a more interesting bond once again,” said Deutsche’s emerging market strategist Christian Wietoska.

Outflows in a stampede out of emerging markets has pushed foreign holdings in South Africa’s bonds to an eight-year low, as the coronavirus pandemic and the rating downgrades that followed sucked-up liquidity and spooked investors.

Foreigners held 31.5% of South Africa’s bond in May, down from 37.3% in January, according to National Treasury data.

But in the last few weeks, with the global economic recovery increasingly on the cards and the local central bank buying government bonds to ease liquidity strains, foreign investors are doing what locals have done all along.

“Look at some of the most obvious mandates, inflation plus 2% to 4%. If you’re being offered a government bond of 11% to 12% and inflation is only 3% or 4%, that’s as close to a slam-dunk as you get,” said chief executive of Canon Assets Adrian Saville.

On Friday central bank data showed the regulator had bought R10.2 billion worth of government securities in May, compared to the R20.6 billion it purchased in April, making its bond-buying scheme among the more conservative policies in emerging markets.

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Signs of bubble and desperation, climbing into junk.

I wrote the following on May 27, 2020 – under the heading ‘’ SA plans R357bn infrastructure fund”.
‘’First World country yield is ‘’stuffed – they will have no choice and forced to start chasing the emerging market yields again – it has happened so many times before!
Exporters will start selling their proceeds into the market again and Importers will also sell their longer-term forward cover taken out (dynamic hedging) – a total reversal of the leads and lags are on the cards…” you buy the rumor (which the market did, and “sell the fact” – as the downgrading, etc. has run its course!
All I can say to the ‘’naysayers’’ is – the massive inflow of fund between mid – 2008 and 2011 (when USD/ZAR strengthened from 11.50 to 6.50), and between mid – 2011 and 2016 (when the USD/ZAR) strengthened from 16.80 to 13.50), will happen again.
It’s time for some sensible ‘’Delta Hedging’’ now – the offshore players won’t be waiting too long before they start positioning themselves – In fact, I think the ‘’smartest’’ money already started selling at 19.0000’’
The chase for yield is on again especially when big names like this starting calling SA as a haven again!

The only slam dunk here is the new precedent that the SARB printing press will buy your bonds with watered down and devalued currency.

The slam dunk is referring to a basket case.

These RSA Long Bonds are great for income where some of the bonds are close to 11% and where the cash alternatives are less than 50% of the Long Bond rate….surely this must be a no brainer? Also,we are in a declining interest rate environment in South Africa and with inflation well below targeted levels, the potential for capital profits as well as the income return is very enticing. Further these are the least risk of all the asset classes and this window of opportunity is closing fast. Most retail investors are not aware that they can buy a “wholesale” RSA bond but I certainly have with great returns and intend to buy more RSA Long Bonds before the returns decline further due to the high demand!!

So why would anyone start a new business in SA with yields like that the risk you take needs to have a high reward of at least double.
Simply put it your business is not making at least 24% profit then the reward is not worth the risk compared to the relatively risk free government bonds.

Where there’s a buyer, there’s a seller.

And of course when SA rates rise again the FX-hedge will get too expensive.

End of comments.

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