South African asset manager Stanlib is betting the selloff in the country’s government bonds has been overdone.
The debt has slumped this month, taking benchmark yields toward highs seen in the pandemic, as investors fret about South Africa’s budget deficit.
While those concerns are valid, the amount of “punishment” on bonds is unwarranted, said Sylvester Kobo, its deputy head of fixed income, who is bullish on shorter-term tenors.
Traders are mulling the risk the government may plug its budget gap by issuing more bonds. Yet the market moves are currently indicating the kind of risk premium last seen in 2020 when the nation might have ended up going to the International Monetary Fund for relief, he said.
“We are not there. The market has punished South Africa materially,” said Kobo. “This premium has to unwind, especially if the global backdrop improves.”
Stanlib, the largest fixed-income manager in South Africa with R650 billion of assets, is concentrating on maturities between three and seven years, the most liquid part of the curve. Securities maturing in 2026 have made a 5.5% return in rand terms this year versus a 1.5% loss for those due in 2048, according to data compiled by Bloomberg.
There are signs higher yields after the selloff are also drawing other investors. Bonds are on track for inflows this month of $427 million, reversing August’s outflows.
That’s also being helped by expectations of the central bank holding interest rates Thursday, with Kobo seeing no further hikes after rates more than doubled to 8.25% in this cycle.
Kobo said that while November’s budget would give a clearer picture of the fiscal situation, the Treasury is already being proactive by varying its issuance and introducing new instruments, such as a sukuk bond, to address revenue needs.
Although there was a recognized shortfall, that would not necessarily translate into a substantial increase in issuance.
“So by November’s medium-term budget policy statement, we think yields will likely be lower due to some of the actions Treasury is already taking now and because they are using a mix of issuance instruments,” said Kobo.
“Overall, they are unlikely to increase numbers in the nominal space. If they do, it will be small, but not enough to warrant the kind of punishment that the market has given them.”