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Foreigners are dumping SA bonds as junk status looms

Non-residents are selling an average of R1.8bn government bonds a day.

Investors have been dumping South African government bonds at a rate of almost R2 billion ($132 million) a day in August.

Read: The market has already downgraded South Africa to junk 

With issuance increasing and a downgrade to junk a looming possibility, non-residents have sold a net R14.4 billion of the debt in August so far, according to JSE data compiled by Bloomberg. That’s an average of R1.8 billion a day. The sales have wiped out inflows at a time when the country needs foreign investment to close a current-account deficit that was equivalent to 2.9% of gross domestic product in the first quarter.

The government increased the amount of local-currency debt sold at weekly auctions by 37% last week to help pay for a R128 billion bailout for Eskom, the state-owned electricity company. That will push up borrowing and widen the budget deficit, placing the country’s last-remaining investment-grade rating at risk. Moody’s Investors Service, which rates South Africa’s debt at Baa3, is reviewing its assessment in November.

Foreign ownership of South African government debt fell to 37.9% at the end of July, the lowest level this year, from as high as 42.8% in March 2018, according to National Treasury data. Foreigners are exiting despite yields that are among the highest in emerging markets, suggesting they’re worried a downgrade to junk would see the nation’s bonds kicked out of indexes that track investment-grade debt, such as Citigroup’s World Government Bond Index.

Though foreign ownership is already the lowest this year, the selloff has continued unabated. Inflows have turned into net outflows of R3.2 billion for the year in August — even at a time when a world awash with negative yields is fuelling demand for riskier assets such as emerging-market debt.

In dollar terms, South African local-currency bonds have underperformed all major emerging markets in August except Argentina’s. Yields on benchmark government securities have risen 111 basis points this month, while the rand has depreciated 5.5% against the dollar, further eroding returns for foreign investors.

© 2019 Bloomberg L.P.

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Nothing to be concerned about. The flight of these timid yellow bellies must be seen in the context of everything else that is out of our control.

I hope this is meant to be a tongue in the cheeck comment. Without foreign funding of our burgeoning deficit spending it will fall to local investors which will mean prescribed assets – that is our pension funds bailing out the governemnt…

Will be interesting to see how much backbone the government has to do that, union workers will not like it.

It was tongue in cheek, but it could have been done better.

Prescribed assets is a foregone conclusion because nothing will deviate the ANC from its destructive course.

The boiling frog metaphor, used by Cyril no less, is very apt.

ANC policy decisions lead incrementally to greater state control, in line with the NDR.

The wide scale looting, waste and neglect around us can be justified by the ruling party’s central ideology.

Read Frans Cronje’s recent speech (published on Biznews) for a well-reasoned analysis.

“…they’re worried a downgrade to junk would see the nation’s bonds kicked out of indexes that track investment-grade debt, such as Citigroup’s World Government Bond Index.”

So pension funds, for instance, would be inclined to sell? And what about foreigners holding local corporate bonds? Will those also be affected if there’s a downgrade?

Many foreign pension funds and other investors are not allowed to invest in countries with junk status. So it’s not that they’d be inclined to sell, they’d be forced to do so.

A corporate bond cannot hold a better rating than the sovereign so yup, they will get dumped too.

Thanks, that answers my question.

I can’t believe how silly these foreigners are! It’s not as if the government is threatening to take property without compensation, or that SOEs are contaminated by incompetent cadre EE appointees, or that these same SOEs are completely bankrupt, or that the government is threatening further socialist madness?

Oh, wait……

my thoughts exactly….. the ANC government are going out off their way to attract foreign investments….we must all be as dumb as these foreigners.

Incitatus…..has it not occured you that the rules protect foreign investors first from loss due to incompatible governances that may restrict exchange controls, preventing outflows of profits

Considering the ANC would like to print more local currency, one can understand the trepidation

So what will happen to an investment in SA bonds if the country is downgraded?

A downgrade means future debt will be more expensive. So higher coupons per new bonds.

Current bonds –there may be more forced selling which drives down the market value of the bond (the price you can sell it for).
Your coupon/ interest however remains unaffected and also if you hold the bond to maturity you still get the same principal back that it cost.
If you simply hold to maturity then actually nothing will happen to your investment. Your principal will be returned and your return is the coupon payments you receive.
If you try to sell, or are forced to sell, then you will have to settle for a lower price than what you bought for and thats where you lose investment return.

(Bonds are a pretty strange asset class to wrap your head around. At least it was and still is for me.)

However, imo the foreigners dumping SA bonds are less about “the risk of further downgrading” and has everything to do with their very real concern that the SA govt may soon have to default on their bond obligations (either unable to pay a due coupon or worse, failing to repay principal that has matured).
If the junk bond buyers dont step into the breach then we know its definitely fear of default driving the selling.

The long-short answer is that its actually very difficult to say what will happen with your current bond investments. I believe SA will default but I am leaving what I currently have in bonds as is until they mature. Too uncertain to make exact predictions.

Thank you David.

To add to your good explanation. Yes, you will not lose money if you hold the investment to maturity, but say your bond pays an 8% coupon and inflation runs at 10% your are losing money in real terms. You also suffer from opportunity cost, so your bond issued 5 years ago for argument sake, pays its 8% coupon, but bonds issued in 2020 after we have been downgraded pays a 12% coupon – in line with prevailing interest rates. So you are earning only 8% when you could have been earning 12%.

At the risk of stating the obvious, if SA defaults you can lose everything

The main issue is currency devaluation. Your principal is guaranteed, yes, but your purchasing power is not. So, in effect, the government will take the purchasing power of your investment in bonds and repay you with your own purchasing power. If that sounds like theft to you, you are hearing right. They will simply print the money to repay the bond, or the currency will weaken because of the investment flight.

Then, after the dust settles and if the Governor stands firm by not printing too much, yield seekers will start buying bonds again. Local businesses will be decimated by the higher interest rates on working capital and house owners will suffer to pay down the bond.

A downgrade to junk status is basically like receiving a speeding ticket on your way to hyperinflation.

If foreigners are net sellers that means South Africans are net buyers. Who in SA is buying ?

Thanks to Reg 28, probably you and me.

Not probably, its a fact. Thats why you should walk straight into HR like when I worked in SA and tell that freeloader you want to stop contributing to thier Reg 28 retirement annuity scam. Take your cash and invest it yourself. You are more than capable.

A reg 28 fund can have zero per cent exposure to bonds.

reminder that funds might sell but wealthy internasional investors can still buy…and with flat and negative yields we look attractive…and maybe I will join them

And all Baby boomers children and Grandchildren are Dumping RSA as well .
Clueless Cadres !

Our beloved President said yesterday that they (The ANC I think?) will fix the economy whether people like it or not.

I guess some foreigners are not liking it then.

CR makes such dumb statements…We are going to build a new city…” uhm how about fixing the ones we already have or will they all be dumped?

“We are going to fix the economy whether people like it or not.” What an idiotic statement.

You can’t take that guy serious at all.

Anyone think it’s a good idea to have pension funds when regulation 28 prevents you from investing all of that overseas to counter the economic decline?

Anyone think it’s a good idea to have shares in fund managers in the current economic climate where foreign institutions are likely to withdraw their multi-billion-rand funds when we get downgraded?

Not sure that foreign fund managers use local asset managers as a vehicle to invest in SA bonds, think most of them do it directly themselves.

That is not to say local fund managers AuM is not at risk from lower market values

Sorry for the cliche but In the 1990s, the Democratic political adviser James Carville said: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Surprised it has taken this long for the bond market to start reflecting the risk of SA but it seems to be happening now.

Things can get very bumpy from here. For historical precedent look at SA post PW’s 85 Rubicon speech

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