Demand at South Africa’s weekly bond auctions has fallen to the weakest average level this year.
Primary dealers placed R11 billion of orders at a sale of 2032, 2035 and 2037 bonds Tuesday, about 2.8 times the R3.9 billion of securities on offer, according to central bank data.
That sent the average demand in May to 2.7 times, below 3.3 for auctions from January through April.
The drop in demand comes even as government-bond yields across the curve yield at the highest levels since the start of the pandemic three years ago.
Investor sentiment on Africa’s most industrialised economy has soured amid persistent energy shortages and a deteriorating economic outlook, besides external risks over China’s patchy recovery and tightening monetary conditions.
“Our main concern about the local bond market remains the strong link between lacklustre underlying economic growth and a weak fiscal position,” said Rhandzo Mukansi, a Cape Town-based money manager at Futuregrowth Asset Management.
“Without adequate and stable electricity provision, South Africa’s weak challenging fiscal situation will continue to serve as the main catalyst for long-dated bond volatility.”
The Treasury sold R1.9 billion of 2035 bonds at a yield of 11.89%. Similar amounts of bonds due 2032 and 2037 were sold at 11.42% and 12.19%, respectively.
The yield on February 2035 notes was trading at 11.91%. Only Russia, Pakistan and Nigeria offer higher returns among major emerging markets monitored by Bloomberg.
The rand traded little changed at 19.03 per US dollar Tuesday. The currency lost 3.9% in May, the worst performance among emerging-market peers.
While a weaker currency has stoked consumer-price inflation, base effects should contribute to a moderation in consumer prices in the third quarter, lending support to local bonds, Mukansi said.
South African assets dropped Monday after the US accused the nation of arming Russia. Geopolitical concerns could weigh on bond performance, Societe Generali said.
“In a scenario of a US/global economic slowdown and lower US Treasury yields, the SAGB curve could flatten sharply,” strategists including Phoenix Kalen wrote in a note.
“However, over the more immediate horizon, rates volatility is likely to stay high, and South Africa’s bond risk premium can expand on fresh geopolitical concerns.”