South African asset managers PSG and Stanlib think that local government bonds have been oversold and offer extremely attractive yields for investors.
Head of fixed income at PSG Asset Management Lyle Sankar told CNBC Africa that while it has been safe to be in cash over the last year, investors should increase their exposure to long-term government bonds.
Long-term bonds have been underperforming money market returns in the past year, but this is unlikely to continue as the Reserve Bank will move to cut interest rates in 2024.
“We are encouraging clients to take a pragmatic view on the government bond market. You need some exposure at this point to bonds,” Sankar said.
South African government bonds have an average yield of nearly 12% due to fears of a fiscal crisis, rising oil prices, and a hawkish outlook from the Federal Reserve.
Sankar said fears of a fiscal cliff are overblown. “The yield implies that SA will either face a debt crisis or inflation will be well in excess of the upper end of the Reserve Bank’s target band (6%),” he said.
“Considering the metrics, we don’t believe a debt crisis is likely over the medium term.”
However, Sankar said the focus of all debt investors will be on the Finance Minister’s medium-term budget on November 1.
It is critical that the Minister outlines a credible plan to limit the country’s fiscal shortfall.
“We think the nominal bond market is extremely attractive right now. I think you do not have to do much, and you will earn a good yield,” Sankar said.
Sankar’s comments echo South Africa’s largest fixed-income asset manager, Stanlib.
Government 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 deputy head of fixed income at Stanlib Sylvester Kobo.
“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.
According to data compiled by Bloomberg, 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.
There are signs higher yields after the selloff are also drawing other investors. Bonds are on track for inflows of R8.11 billion ($427 million) this month, reversing August’s outflows.
That’s also being helped by expectations of the central bank holding interest rates at its last meeting, 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 proactive by varying its issuance and introducing new instruments, such as a sukuk bond, to address revenue needs.
Although there was a recognised 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.”