Foreigners are rushing out of South Africa’s rand bonds, while locals can’t get enough.
Foreign investors have been net sellers of government debt every day so far in February, offloading a cumulative R31 billion, according to daily flows data reported by exchange operator JSE.
Over the same period, demand at the weekly bond auction has surged, with Tuesday’s sale drawing the most orders in almost two years.
Primary dealers placed R16.8 billion worth of orders at the weekly auction, more than four times the R3.9 billion of securities on offer, according to data published by the central bank.
That’s the strongest demand since June 2021 and compares with an average bid-to-cover ratio of 2.8 times since the end of November.
The explanation for the disconnect is the rand. The South African currency has been falling this year, racking up a loss of 5.3%. Only the Argentine peso has performed worse among 23 emerging-market currencies tracked by Bloomberg.
The nation’s local-currency bonds have been the worst in emerging markets over the past month in dollar terms, with a loss of 6.3% — compared to an average 1.4% decline for peers in a Bloomberg index.
For rand investors, the return has been flat.
The yield on South Africa’s 10-year notes is close to 11%, eclipsed in Europe, the Middle East, and Africa only by Turkey, Russia, Nigeria, and Lebanon. The next highest yield available in the region is Hungary, which offers around 8.1%.
That enticing yield has some banks, including Deutsche Bank AG and JPMorgan Chase & Co., predicting a rally from here.
“It is difficult to not to like South African government bonds at the moment,” said Christian Wietoska, head of CEEMEA research at Deutsche Bank AG in London.
“Steady-state return characteristics remain extremely favorable, technicals are supportive and foreign positioning is light.”
Deutsche Bank is overweight the debt while hedging the currency risk. It forecasts the 10-year yield falling to 10.25% by mid-year and 9.75% by year-end.
In a 13 February note, JPMorgan also said it was overweight South Africa’s local-currency bonds.
The bank’s Global Bond Opportunities Fund recently added South Africa’s 2032 debt to its portfolio, according to the most recently disclosed holdings in data compiled by Bloomberg.
Some of the $2.9-billion fund’s top holdings are 2035 rand bonds.
Risks to the rand including next week’s annual budget presentation and a worsening energy crisis are already reflected in the steepness of the yield curve, said Deutsche’s Wietoska.
“We believe these will mostly be reflected in FX as we can see from recent price action,” he said. “Hence our FX-hedged recommendation” to short the currency while going overweight bonds, he said.