Business Insider Edition

South African bonds are now offering eye-popping returns compared to the rest of the world

Helena Wasserman , Business Insider SA
 Aug 07, 2019, 04:17 PM
A growing number of European bonds are now offering negative yields.
  • European and Japanese government bonds are now offering negative yields, meaning investors are putting money into these assets knowing they will lose money on the deal.
  • Meanwhile, the yield on the South African 10-year bond is at more than 8%.
  • A local fund manager thinks that some local investors should start to consider investing in bond unit trusts.
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In a world where investors are paying some governments for the privilege of lending them money, the fat yields on South African government bonds are standing out more and more.

This is evident from a comparison put together by Charlie Bilello, director of research at investment group Pension Partners:

10 year bonds
10-year government bond yields. Source: Charlie Bilello

It shows that yields on government bonds from ten countries – including Germany, the Netherlands, Japan and France – are now below zero. The yield on a government bond is the return investors will earn. A negative yield means that investors will lose money on their investment.

Meanwhile, the 10-year South African bond are now offering an eye-popping 8.4%.

Even after inflation, our government bonds are yielding almost 4% - compared to minus 3% in the Netherlands.

Still, foreigners are not biting. Despite the high local yields, foreign investors have been dumping South African bonds in past weeks.

A month ago, foreigners were still net buyers of almost R13 billion in South African bonds this year. But by last week, this was down to R5.1 billion.

The trade war between the US and China, which in the past week got much bloodier, is scaring global investors into assets that do not have the faintest whiff of risk: European, US, and Japanese bonds. Even if they are losing money on these investments, they would rather buy these bonds than risk losing larger amounts elsewhere. 

They see South African bonds as just too risky – especially since the market expects Moody’s to downgrade South African bonds. This will strip us of our investment grade rating, and our government bonds would be rated as “junk”, meaning that some of the largest pension funds in the world won’t be allowed to buy South African bonds.

But Izak Odendaal, investment strategist at Old Mutual Multi-Managers, says the downgrade has already been priced into local bond prices.

He expects that once the dust settles after this initial shock over the China-US trade war, global investors will wake up to the fact that interest rates around the world are extremely low - while rand assets still offer a solid yield.

SA bonds
SA bond yields. Source: Anchor Capital, Bloomberg

Should you invest in bonds?

Investing in South African government bonds may be something some local investors should start to consider, says Schalk Louw, a portfolio manager at PSG Wealth.

The Reserve Bank looks set to keep inflation below the 5% mark, which means that you will earn at around 4% after inflation from a bond investment with basically no risk.

“It is starting to look attractive – especially as the stock market remains in turmoil.”

His preferred investment options would be either RSA Retail Bonds, which currently offer 8.4% a year (or you can choose to receive 3.25% plus the inflation rate) over five years, or unit trusts that invest in bonds.

These bond funds have been outperforming money market funds: In the past year, the benchmark return for local bond funds was 11.5% - compared to the money market benchmark of around 7%.

What are government bonds?
A bond is like an IOU, with the borrower agreeing to repay an amount plus interest.Government bonds are issued by countries, which promise to repay an amount at a fixed rate of interest at a specific time. The 10-year government bond, for example, will be repaid in 10 years.After a government issued the bonds, they are bought and sold by investors to other investors in the market. 

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