2024 will be a good year for South African bonds

2024 will be a good year for South African bonds since their high yields will attract foreign investors looking for returns as the Federal Reserve will begin to cut interest rates, making riskier assets and currencies more attractive. 

This is feedback from a fixed-income portfolio manager at Sanlam, James Turp, who told CNBC Africa that local bonds are finishing the year strong, and the momentum will continue into 2024. 

2023 was a difficult year for South African bonds, with rising interest rates eroding their value and the government increasing the issuance of local debt. 

Other factors, such as multiple geopolitical blunders, increased load-shedding, and the country’s deteriorating trade balance, scared foreign investors, with many dumping local bonds. 

The government’s growing debt burden also risks becoming unsustainable, reducing the attractiveness of local debt. 

However, South African bonds have rebounded towards the end of the year, with the All Bond Index rising 5% in November. 

Turp expects this to continue into December as this is traditionally a good month for bonds as coupon payments come through and governments close bond auctions. 

This results in a lot of cash looking for a home, and South Africa’s high yields make its debt very attractive. 

These yields are likely to remain high, according to Turp, as the Reserve Bank delays cutting interest rates until after South Africa’s general elections next year. 

If rates are higher for longer and inflation decreases steadily, local bonds will be very attractive as their real returns will grow. 

Turp cautioned that this depends on the elections going on without any hiccups or major concerns about the government’s economic policy. 

Furthermore, the Federal Reserve will likely cut interest rates aggressively in the US, encouraging investors to look for real returns in riskier assets such as South African bonds. 

“Should that play out, we will be a passenger to that positivity, and any good news out of South Africa will help,” Turp said. 

“I am hoping for a good year in bonds. I think the stage is being set globally for a good period for bonds. Let’s hope that plays out.”

Finance Minister Enoch Godongwana

Turp’s comments echo those from South Africa’s largest bond investor, Stanlib. 

Deputy head of fixed income at Stanlib, Sylvester Kobo, said in a note to clients that the asset manager thinks the bond market has priced a significant risk premium into South African government bonds. 

Kobo thinks this is overly negative and expects bonds to rally further towards year-end on the back of the Finance Minister’s Medium-Term Budget Policy Statement (MTBPS). 

The MTBPS showed that many of the expected fiscal risks have been realised, with the government’s budget deficit widening, borrowing increasing, and debt continuing to rise. 

However, Kobo said these revisions by the Treasury were not as bad as the market expected and had priced into local bonds. 

The MTBPS was also consistent with the Treasury’s plan to reduce spending and implement fiscal consolidation. 

The fact that the Treasury showed its determination to continue with fiscal consolidation in a challenging environment was well received by the bond market, Kobo said. 

Global bond markets are rallying on the back of this, lending support to the local market.

In the absence of any new and unexpected risks, and given the attractive starting yields on bonds globally and locally, we expect the asset class to be supported in the near term. 

Under these conditions, investments in fixed-income assets are expected to deliver a real return superior to those available from cash. 


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