Demand for South African bonds surges ahead of elections

Investor demand surged at South Africa’s weekly government bond sale on Tuesday, a day ahead of a general election that could be pivotal for markets.

Primary dealers placed orders for R16.2 billion of debt, more than four times the R3.75 billion of securities on sale.

This compares with a bid-to-cover ratio of 3.6 at the previous auction, according to central bank data compiled by Bloomberg.

Buying bonds at the sale gives investors the opportunity to participate in a so-called non-competitive auction on Thursday, where more of the debt could be acquired at today’s clearing yield.

That amounts to a “free call option,” according to Hanna de Nobrega, an economist and quantitative analyst at Prescient Investment Management.

“If the election results are market-friendly, bonds will rally, and investors can buy at the previous clearing yield, effectively purchasing cheap in a rising market,” she said.

If the outcome is unfavourable, investors could simply hold the bonds for the yield, “so there is little to no downside risk to the trade,” she said.

Over the medium term, government bonds could be the biggest beneficiaries of a favourable election outcome.

As central banks globally move into an easing phase, the search for yield becomes more urgent, making South Africa’s double-digit returns particularly attractive.

Only five emerging markets offer higher yields, including Lebanon, Russia, and Nigeria.

Despite foreign investors being net buyers of government bonds this year, non-resident holdings of the debt fell to less than 25% at the end of April, according to National Treasury data.

South Africa’s 10-year yield had dropped three basis points by 1:22 p.m. in Johannesburg. It traded at 12.08%, having declined for the first day in four.