Auction Suggests Investors Losing Taste for South African Bonds

(Bloomberg) -- Bond investors are losing their appetite for South African debt after the government increased issuance a second time this year to help plug a yawning budget deficit.

Demand at the weekly fixed-rate bond sale on Tuesday fell to the lowest since the height of the Covid-19 selloff in March. The nine primary dealers that buy bonds directly from the government placed orders of 12.97 billion rand ($758 million) for the 6.6 billion rand of securities on sale. That’s a bid-to-cover ratio of 2, compared with 2.2 at the previous sale.

Demand at the weekly auctions had been well below average since the National Treasury raised issuance by 34% in May. It increased the amount again by 500 million rand on Tuesday, even as some analysts questioned whether investors have the stomach to continue absorbing the pile of new debt at a cost that’s still low enough for the government to afford.

The government had to pay well above market rates on Tuesday to sell the targeted amounts of securities due 2026, 2030 and 2048. The clearing yield on the 2026 notes was 7.9%, compared with 7.84% before the start of the auction and a close of 7.79% on Monday. The 10-year yield jumped to a two-month high after the sale.

Last week’s sale of inflation-linked bonds -- although a smaller affair -- provided a portend of things to come: the Treasury was only able to allocate 1.6 billion rand of the 2 billion rand of securities on offer, after increasing the sale amount from 1.4 billion rand.

“It feels like the market might have reached its saturation point for South African government bonds,” Michelle Wohlberg, a fixed-income analyst at Rand Merchant Bank in Johannesburg, said in a client note before today’s auction. “Yields have sold off quite a bit over the last week and do seem attractive at current levels. Unfortunately, the other side to this coin is why buy today if you can buy next week at a higher yield as the market struggles to digest the sheer size of the auction?”

The government caught investors off-guard on June 26 when it announced the increase in issuance to help plug a yawning budget deficit. Finance Minister Tito Mboweni said earlier that week that the government would tap international finance institutions and draw down cash deposits with the central bank to ease pressure on the local bond market.

South Africa’s consolidated budget deficit will widen to 15.7% of gross domestic product this year as the coronavirus lockdown takes its toll on the economy and tax collection, he told lawmakers.

Unlike the inflation-linked bond auctions, the weekly fixed-rate sales can’t fail, because the primary dealers who participate are obliged to buy all the debt on offer. The rising yields, however, are a reflection of waning bidding interest. Yields on 10-year fixed-rate bonds climbed 16 basis points on Tuesday to 9.7%, the highest among major emerging markets monitored by Bloomberg.

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