South Africa’s proposed addition to Citigroup Inc.’s World Bond Index may drive yields to the lowest in more than three years based on Mexico’s experience, according to Royal Bank of Scotland Group Plc.
The yield on South Africa’s 10.5 percent bonds due 2026 dropped four basis points today to 8.16 percent, the lowest since Feb. 3. The yield dropped 23 basis points yesterday, the most since 2009, after Citigroup said it may include the nation’s debt in the index. It may fall as low as 7.70 percent in coming months, according to Demetrios Efstathiou and Roderick Ngotho, London-based RBS analysts. That would be the lowest level since January 2009, according to data compiled by Bloomberg.
The rate on Mexico’s 7.5 percent bonds due 2027, known as Mbonos, fell 97 basis points in the months leading up to the Latin American nation’s inclusion in the index in October 2010.
“Like in the case of Mexican Mbonos, we think that an outperformance of the South African market should be expected in the near future,” Efstathiou and Ngotho said in e-mailed comments. “Already markets started pricing in the benefits of the expected inclusion.”
The South African Government Bond Index met all requirements for inclusion in the World Government Bond Index in April, and will be included in the gauge from October if it meets tests in May and June, New York-based Citigroup said in an e-mailed statement. Inclusion in the index, a first for the continent, may fuel demand from investors who track the gauge, attracting as much as $7.5 billion to the nation’s bond market, according to Citigroup data.
Foreign investors bought a net 7.8 billion rand ($996 million) of South African bonds yesterday, the second-largest ever after they bought 14.7 billion rand of the nation’s debt on April 25, 2008. Yesterday’s purchases brought total non-resident investment in rand bonds this year to 25.3 billion, according to JSE Ltd. data.
“An additional attractive aspect of South African bonds is that the real yields are close to the highest available in the index,” George Glynos, an economist at Johannesburg-based ETM Analytics, wrote in e-mailed comments today.
The average yield of the 11 South African bonds that may be included is the highest of any of the 22 countries in the index, at 7.6 percent, compared with 1.63 percent average for the gauge, Citigroup said. South Africa’s bonds would have a 0.44 percent weighting in the index, compared with 0.64 percent for Mexico, and 0.55 percent for Poland.