Why investors are still looking at the rand
The hunt for yield has trumped a demotion of South Africa’s local-currency debt to junk, with the rand posting its best monthly gain this year in November.
S&P Global Ratings cut the nation’s credit rating on Nov. 24, and Moody’s Investors Service warned it may do the same within the next three months.
Still, borrowing dollars to buy the South African currency proved a profitable strategy, with the rand carry trade returning 3.7% in the month and beating 21 out of 22 emerging-market peers.
Having been dealt what should have been a crippling blow by S&P Global Ratings on Friday, sparking a 2% slump, the currency advanced as much as 3.3% on Monday, on track for its best day since December 2015, after Moody’s Investors Service retained its investment-grade rating on the nation’s local-currency debt.
The reprieve by Moody’s meant South Africa retains its position in Citigroup Inc’s World Government Bond Index for now, even though the company said it may cut the assessment after the February budget. An exit from the index would spark forced selling of local bonds by investors that track the gauge, leading to outflows of much as $10 billion, according to Societe Generale SA.
Further reporting from Bloomberg.
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