JSE
The JSE building in Sandton. Photo: Elvira Wood
  • Last month, foreign investors were net buyers of R13 billion in South African bonds.
  • This was the first time since June that they bought more than they sold.
  • This is thanks to a growing risk appetite, as well as the fat local rates on offer.
  • For more articles, go to www.BusinessInsider.co.za.

For the first time in months, foreign investors have been keen buyers of South African bonds in November. They bought R13 billion in local bonds more than they sold last month.

So far this year, foreigners were the net sellers of R64.6 billion in SA bonds – but this is much less than the large outflowof between R110 billion and R250 billion, that analysts expected following SA's downgrade to junk in March this year. It was feared that the Moody’s downgrade would trigger a massive sell-off as foreign investment funds which can only invest in investment-grade bonds, had to dump local bonds. In truth, the selling was much tamer than expected, and in recent weeks, foreigners have been buying again.

Source: PSG

Confirmation that Covid-19 vaccines are proving successful – as well as the conclusion of the US election – gave investors comfort to take on riskier investments, like emerging market bonds.

“The jump in global risk appetite spilled over to the South African bond market as those foreign bond investors who are indifferent to sovereign credit ratings took their cue from the relative high level of local yields,” said Wikus Furstenberg, portfolio manager and head of interest rate process at Futuregrowth Asset Management.

Many government bonds – including the US and most of the rich European countries – now offer negative yields. This means that investors are paying these countries for the privilege of lending them money. In comparison, South African bonds are still offering an attractive, positive rate.

Here's how the after-inflation rates on 10-year government bonds compare: 

Global 10-year real treasury rates, as well as S&P foreign currency credit ratings. Source: Futuregrowth, Bloomberg

The JSE’s All Bond Index (which includes mostly government, but also corporate bonds) is currently offering a yield of 10%. With the IMF expecting South African inflation to reach 4.3% next year, this implies a return of almost 6% over the next year, says Schalk Louw, a portfolio manager at PSG Wealth.

“These are equity-like returns.” Meanwhile the US has indicated that its interest rates won’t be hiked before 2023.

The rates on offer on the ten-year South African government bond is currently around 9% - much higher than most other bonds, including in other emerging markets like Brazil (7.6%).

It indicates that investors believe that South Africa will eventually default on its bond payments, and may be forced to turn to the International Monetary Fund, says Louw.

Treasury expects South Africa’s GDP to debt ratio to blow out to above 95% in the next five years amid a weak economy, pressure on tax revenue collection and the inability of the state to cut current expenditure to offset this.

But a potential default and most of the trouble that South Africa is facing, have already been priced in, believes Louw. He thinks bonds offer a very good opportunity – also to local individual investors.

His preferred investment options would be bond-focussed unit trusts, or even South African balanced unit trusts, which also have exposure to shares. Louw says the largest balanced funds - including Allan Gray, Coronation, Prudential and PSG - have all increased their bond holdings in recent months.

An alternative would be RSA Retail Bonds, which currently offer 7.75% a year (or you can choose to receive 5.75% plus the inflation rate) over five years.

While international investors are buying local bonds, shares remain hugely unpopular.  Foreigners have been net sellers of local shares for 17 straight months.

But foreign buying of SA bonds may eventually translate in greater buying of shares too, Louw said. “As risk appetite grows, investors should start to graduate from safer investments like bonds to higher-risk assets like shares.”

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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