Laggard South African Bonds May Get Seasonal Boost at Year-End

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South Africa’s government bonds may end a miserable year on a more positive note, if the history of seasonal trading is anything to go by.

Three of the most liquid debt tenors have handed positive returns to investors between December and January in recent years, according to Rand Merchant Bank.

Local-currency bonds maturing in December 2026 have seen yields drop in 14 of the last 21 years, since they were first sold, Varushka Singh, a fixed-income and currency strategist at Rand Merchant Bank said in a note to clients. The rate on securities maturing in January 2030 narrowed in five of the past six periods, while those due in February 2048 fell four out of six times, the Johannesburg-based analyst said.

Laggard South African Bonds May Get Seasonal Boost at Year-End

The year-end boon may help South African government bonds narrow a 3 percentage point underperformance of the 4.7% dollar return on developing-nation debt this year. A deteriorating budget outlook and the bonds’ exclusion from a key index have added to headwinds from the impact of the coronavirus pandemic with only Turkey, Brazil and Russia faring worse.

No Event Risk

Investor demand has grown in the run-up to this year’s last Treasury sale on Dec. 15. Traders placed 22.9 billion rand ($1.6 billion) of orders or 3.5 times the 6.6 billion rand of securities on sale, showing higher demand than the average of 2.6 bid-to-cover since ramped up issuance began in July.

The yield on the longest-dated bonds has dropped for nine days straight, its longest streak on record. The country’s local-debt as a whole has handed investors a 6.4% return in dollar terms this month, compared to the emerging-market average of 1.5% in a Bloomberg index.

READ: South African Bonds Have Room to Gain After World-Beating Rally

“We expect bonds to rally over the festive period and the curve to continue to flatten this month and early next year,” said Singh. “There is no event risk expected for the remainder of this year that could push yields higher and steepen the curve.”

©2020 Bloomberg L.P.

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