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.<\/p>\n
Over the same period, demand at the weekly bond auction has surged, with Tuesday\u2019s sale drawing the most orders in almost two years.<\/p>\n
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\u2019s the strongest demand since June 2021, and compares with an average bid-to-cover ratio of 2.8 times since the end of November.<\/p>\n
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.<\/p>\n
Worst Performers<\/strong><\/p>\n The nation\u2019s local-currency bonds have been the worst in emerging markets over the past month in dollar terms, with a loss of 6.3% \u2014 compared to an average 1.4% decline for peers in a Bloomberg index. For rand investors, the return has been flat.<\/p>\n The yield on South Africa\u2019s 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%.<\/p>\n That enticing yield has some banks, including Deutsche Bank AG and JPMorgan Chase & Co., predicting a rally from here.<\/p>\n \u201cIt is difficult not to like South African government bonds at the moment,\u201d said Christian Wietoska, head of CEEMEA research at Deutsche Bank AG in London. \u201cSteady-state return characteristics remain extremely favourable, technicals are supportive and foreign positioning is light.\u201d<\/p>\n Deutsche Bank is overweighting 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.<\/p>\n In a 13 February note, JPMorgan also said it was overweight South Africa\u2019s local-currency bonds.<\/p>\n The bank\u2019s Global Bond Opportunities Fund recently added South Africa\u2019s 2032 debt to its portfolio, according to the most recently disclosed holdings in data compiled by Bloomberg. Some of the $2.9-billion fund\u2019s top holdings are 2035 rand bonds.<\/p>\n Risks to the rand including next week\u2019s annual budget presentation and a worsening energy crisis are already reflected in the steepness of the yield curve, said Deutsche\u2019s Wietoska.<\/p>\n \u201cWe believe these will mostly be reflected in FX as we can see from recent price action,\u201d he said. \u201cHence our FX-hedged recommendation\u201d to short the currency while going overweight bonds, he said.<\/p>\n
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