Stanlib says its time to buy government bonds

South African government bonds offer some of the most attractive yields globally, with limited downside risk and further tailwinds from global central banks cutting interest rates. 

This is feedback from one of South Africa’s largest bond investors, Stanlib, which manages over R600 billion in assets. 

Stanlib’s head of fixed income, Victor Mphaphuli, said this would be a good time for clients to consider investing in a well-managed fixed-income fund for superior returns to a money market fund. 

While US Treasuries offer attractive returns, Mphaphuli said this is unlikely to last as the Federal Reserve will begin cutting rates soon. 

“Inflation keeps moderating, and employment will soften enough to allow the US Federal Reserve to cut, but growth is holding up,” he said. 

Therefore, to chase higher yields, investors will have to invest in Treasuries with longer maturities or look for higher yields in emerging markets. 

The most attractive government bonds are South African, as the country’s bonds offer a 7.7% yield in US dollars – the highest among its emerging market peers. 

Mphaphuli said this yield will only improve as central banks around the world cut rates and volatility in the bond market fades. Stanlib projects a total return from the 10-year government bond of more than 14% over the next 12 months. 

South Africa’s attractive 10-year yield in US dollars is shown in the graph below. 

Local government bonds are made even more attractive because South African debt is relatively low-risk for such a high yield, considering the country’s debt-to-GDP ratio. 

“We think that investors in government bonds are being well compensated for the risks of fiscal slippage,” Mphaphuli said. 

 “The credit default swap markets are sending a relatively strong message about South African sovereign credit, supported by the remarkably long average maturity of the government’s debt.”

The move by the government to use R150 billion of its gold and foreign reserves account reduced the risk of fiscal slippage. 

Stanlib’s comments echo those of a fixed-income portfolio manager at Sanlam, James Turp, who said there is strong momentum behind local bonds in 2024. 

Yields on South African bonds 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.”

The graph below shows the high compensation an investor would receive for investing in South African bonds with relatively low risk.