South Africa\u2019s rand extended gains and benchmark bonds recovered almost all their losses since the start of the coronavirus sell-off as investors looked past mounting domestic risks to focus on the prospect of further global stimulus and signs of progress in treating the disease.<\/p>\n
S&P Global Ratings cut South Africa deeper into junk on Wednesday amid concern the Covid-19 pandemic will send the economy into a sharp downturn.<\/p>\n
Last month, the country lost its Moody\u2019s Investors Service investment-grade credit rating, which will lead to rand bonds being excluded from the FTSE World Government Bond Index when it is reweighted at the end of trading Thursday.<\/p>\n
The gauge is tracked by around $3 trillion of funds.<\/p>\n
Still, the rand advanced for a fifth straight day on Thursday, heading for its strongest level against the dollar in three weeks on a closing basis.<\/p>\n
The currency\u2019s implied volatility fell to the lowest since the beginning of March, suggesting traders expect price swings to narrow in coming weeks, even with the risk of capital outflows.<\/p>\n
\u201cQuite odd, considering South Africa\u2019s impending exit from the WGBI and S&P\u2019s one-notch downgrade of the sovereign\u2019s foreign-currency rating,\u201d said Nema Ramkhelawan-Bhana, a Johannesburg-based analyst at FirstRand Bank Ltd.<\/p>\n
\u201cA clear sign that global determinants are outweighing local risks.\u201d<\/p>\n
Yields on the most-liquid 2026 government rand bond fell 25 basis points to 8.48%, the lowest since March 11, the day before heightened concerns about the spread of the virus sparked an exodus from emerging-market assets.<\/p>\n
The ratings company downgraded the country\u2019s long-term foreign-currency rating to BB-, three notches below investment-grade, from BB.<\/p>\n
South Africa\u2019s cost of servicing public debt will climb to about 6.5% of gross domestic product by 2023, S&P said Wednesday. Yields on 10-year Eurobonds dropped 11 basis points to 7.04%.<\/p>\n
The spread has narrowed from as high as 781 in March.<\/p>\n
The exit from the WGBI may trigger forced selling by funds that track investment-rated indexes, sparking outflows of a much as $10 billion, by some estimates.<\/p>\n
Still, some of that positioning may have happened already. Outflows from the country\u2019s bond market this year are at R63 billion ($3.5 billion), according to JSE Ltd data. Foreign investors were net sellers of R116 million of South African bonds on Wednesday.<\/p>\n