Price Surprise Spells Misery for South Africa's Unloved Linkers

(Bloomberg) -- An unexpected slowdown in consumer inflation may add more misery for South African inflation-linked bonds.

With price increases firmly inside the central bank’s target range of 3 percent to 6 percent, and forecast to stay there for the next two years, investor demand for protection against price increases has slumped. The National Treasury failed to attract enough bids to fully allocate index-linked securities at the last two weekly auctions, even after reducing the amount on offer to 600 million rand ($50 million).

Read more about South Africa’s failed linker auctions here

South Africa’s inflation rate fell to seven-year low in March, slowing to 3.8 percent from a year earlier compared with 4 percent in February. The median estimate of 20 economists in a Bloomberg survey was 4.1 percent.

With yields below 3 percent, linkers won’t be able to compete with nominal debt offering real rates of more than 4 percent, according to Nedbank Group Ltd. “From a valuation perspective, we still see most value in nominals rather than in linkers,” said Nedbank analyst Reezwana Sumad.

Price Surprise Spells Misery for South Africa's Unloved Linkers

“We need to see long-end inflation linked bond yields rise closer to 3 percent to offer value,” Sumad said. “For now we don’t see that happening. Inflation is likely to remain benign until at least the end of 2019, hence capping inflation-linked bond yields.”

The Treasury will offer 600 million rand of linkers maturing in 2029, 2033 and 2050 at Friday’s auction. Last week, the sale attracted only 360 million rand of bids, with 280 million rand of securities allocated. The previous week, 495 million rand was sold on orders of 545 million rand.

The yield on rand-denominated government bonds due December 2026 fell two basis points to 8.05 percent by 10:19 a.m. in Johannesburg following the release of the inflation data. The yields on index-linked securities due January 2038 were little changed at 2.47 percent.

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