Money and Markets

Despite load shedding and general grimness, foreigners are piling into South African bonds

Business Insider SA
The JSE building in Sandton. Photo: Elvira Wood
  • Despite a tumultuous time in South Africa, foreigners were the net buyers of R1.8 billion in South African bonds last week.
  • So far this year, they have been net buyers of R13.4 billion in local bonds.
  • The value South African bonds are offering may be the main attraction, a local investment expert says.
  • For more stories, go to Business Insider SA's home page.

Last week, while load shedding continued to wreaked havoc in South Africa and parliament saw a rather chaotic State of the Nation Address, foreign investors continued to pile into South African bonds.

They bought R33.5 billion worth of South African bonds, selling R31.7 billion in the same week – leaving them the net buyers of almost R1.8 billion in local bonds.

In the same week last year, they were net sellers of almost R3 billion in South African bonds, according to JSE statistics.

So far this year, they have been net buyers of R13.4 billion in South African bonds, almost 40% more than the R9.7 billion in the same period last year.

The main reason for the demand may simply be the relative value South African bonds are offering in international markets, specifically compared to emerging markets, says Wikus Furstenberg, portfolio manager and head of interest rate process at Futuregrowth Asset Management, which manages R194 billion in assets.

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.

The yield on South Africa's 10-year government bond is 8.98%, considerably higher than most other markets.

The yields on government bonds from countries like 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. Even Greece – whose economy is still in a precarious position, and as recently as in 2012 had a 42% yield- is now offering less than a percent.

Source: Futuregrowth

South African government bonds also have more attractive yields than other emerging markets like Brazil and India:

Source: Charlie Bilello

Foreigners remain buyers of domestic bonds despite the expectation that South Africa will finally be rated junk as early as next month, when Moody’s is expected to be the last credit rating agency to strip SA of its investment grade rating.

This rating was the only thing that stood between SA government bonds being rated as “junk”, meaning that some of the largest pension funds in the world won’t be allowed to buy South African bonds.

But Furstenberg says South African bonds have been trading as sub-investment grade (junk) for a while now. “This implies a lot of the negative news flow already discounted.” 

Still he believes that the market may still respond negatively when Moody’s finally takes the big step. 

“Passive or benchmark-driven foreign investors will only sell on the back of the actual event since this will trigger SA’s global index exclusion.”

It’s hard to predict whether foreigners will keep on buying South African bonds at the current rate, he adds.

“What we do know is that every Tom, Dick, Harry and his dog is on the same old news-band wagon – fiscal slippage, SOE-drama and Moody’s down grade.

“A yield spike is possible, but this may very well be followed by a bull rally as the unconstrained investor who merely hunts for best relative value steps in – including us.

"There is always a point where valuation trumps news flow, especially old news flow like in this case.”

While down from recent years, foreign investors still own more than 37% of South African government bonds.

Source: Futuregrowth

“Their share of the total RSA government bond market is very significant. Yields (and thus funding cost) would be higher in their absence,” says Furstenberg.

While South African bonds remained in hot demand among foreigners, equities are not as popular.

So far this year, foreigners have been the net sellers of more than R4 billion in domestic equities. Still, this is a better performance than in the same period last year, when there was net selling of almost R10 billion.

Compiled by Helena Wasserman

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