Online Reporter
South Africa’s 10-year government bond yield dropped below 10 percent for the first time in more than three years as investors bet the nation will be successful in its third attempt at corralling support for its budget.
The yield on South Africa’s rand-denominated debt due in 2035 fell 14 basis points to 9.99 percent at 5:01pm in Johannesburg, the lowest on a closing basis since April 11, 2022, after a panel of lawmakers approved the National Treasury’s fiscal framework yesterday.
That’s the latest signal that the annual budget will finally win approval after some members of the governing coalition rejected it twice.
The bonds have rallied since Finance Minister Enoch Godongwana presented the revised budget to lawmakers last month.
An auction of local-currency government bonds attracted the strongest demand in almost three months on Tuesday. Moves toward a lower inflation target for the South African Reserve Bank supported the rally.
“The decline in South African government bond yields reflect investors’ assessment of policymakers’ greater control of inflation dynamics going forward, as well as confidence in the governance framework and institutional strength of the country,” said Phoenix Kalen, head of emerging-market research at Societe Generale SA.
“The latter points have helped to reduce the risk premium imposed on South African fixed-income assets.”
The relatively benign backdrop for global economic growth and inflation also contributed to the rally, as did optimism for a favourable outcome in trade negotiations between South Africa and the US, Kalen said.
The potential for the adoption of the budget after months of wrangling on tax increases and spending cuts, together with easing tensions in the coalition government, has boosted confidence that South Africa will meet its fiscal targets and curb government debt.
Meanwhile, South African Reserve Bank officials have argued in favour of a lower inflation target after the consumer price index fell below its target range of 3 percent to 6 percent, in place since 2000. Annual consumer inflation was just 2.8 percent in April.
The central bank resumed its easing cycle last week, when it cut the repurchase rate by 25 basis points to 7.25 percent.
“We can see the rally in South African government bonds extending with the break of 10 percent in the 10-year rates,” said Anders Faergemann, a portfolio manager at PineBridge Investments.
“Real yields remain high in South Africa and the SARB’s inflation target is under review to be lowered, in which case we could see 10-year yields drop another 50 basis points toward 9.50 percent.” — Bloomberg.
