South African bonds are headed for an eighth consecutive day of declines, a losing streak last seen at the height of the Covid pandemic.
Concerns that the mid-term budget in early November will reveal a wider-than-expected deficit are weighing on sentiment, given worries about missed tax-collection targets, state-owned company bailouts and relentless power cuts that have hobbled economic growth.
Any additional government bond sales in the local market to close funding gaps would come at a time of already high issuance.
Yields on rand debt due in 2035 have climbed to 12.12% in the longest selloff for the bonds since the nine days ended June 17, 2020, according to data compiled by Bloomberg.
“The overriding concern is of a wider deficit, failure to consolidate, more debt overall over the medium to long term and, by implication, further erosion of debt sustainability,” said Mamokete Lijane, global markets strategist at Standard Bank Corporate and Investment Banking.
A failure in the November budget to present a fiscal stance that showed “credible” consolidation in the medium term would be negative for the bond curve, even if issuance weren’t increased, Lijane said in an emailed response to questions. “However, increased issuance would have a bigger impact than if you just have a wider deficit.”
The South African Treasury had other options for funding, including offshore bond sales, sukuk, cash and domestic floating-rate notes, she said.
Tapping the local bond market instead would be “the most negative signal that could be sent,” implying that whatever fiscal slippage had occurred was deemed more permanent than not, she said.
Still, the market is already discounting quite a negative outcome, which may limit any selloff.
Meanwhile, demand at South Africa’s regular bond auction fell to the weakest in three weeks on Tuesday.
Primary dealers placed R8.7 billion of orders at a sale of 2032, 2037 and 2044 bonds. That’s about 2.2 times the R3.9 billion of securities on offer, according to data from the central bank.