South African bonds shine amid reduced debt sales

On Tuesday, South African local-currency bonds were the best performers in emerging markets after the government’s reduced-size weekly debt sale drew strong investor demand.

Yields on rand-denominated debt due 2035 slid seven basis points from the previous close to 12.12% by 12:03 p.m. in Johannesburg, the first decline in three days. Yields across other tenors also fell.

Primary dealers placed orders for R14.3 billion worth of securities at Tuesday’s sale, nearly four times the R3.75 billion on offer. That’s the best bid-cover ratio in six weeks.

This is only the second auction since a new rule took effect on April 1, reducing the amount of competitive fixed-rate debt to be sold weekly.

The rule, introduced in February’s budget, cut issuance by R150 million a week. The Treasury’s April 2 auction saw a better bid-cover ratio than the prior week but was well below the latest level.

Michelle Wohlberg, a fixed-income analyst at Rand Merchant Bank, played down the reduction in competitive bond issuance, noting that increased volumes of noncompetitive securities offset this.

The latter now comprise 75% of bonds on offer, up from 50% before the new rule came in, she said, estimating this could result in R6.56 billion being issued per week compared to the previous R5.85 billion.

Under non-competitive bidding, investors apply for securities without specifying the yield and must accept whatever yield is set at the weekly auction.

“So even though National Treasury is issuing less in the weekly auctions, they might be issuing more than they did in the previous financial year if non-comps are exercised regularly,” Wohlberg said. 

“It will be interesting to see the price action after a few auctions to see if the market can rally post a Tuesday auction or if we see bonds selling off more regularly,” she added.