South African bonds are posting the best returns in emerging markets this month as yields among the highest for similarly rated nations lure foreign buyers amid signs inflation is slowing.
Rand debt with maturities of one year or longer returned 3.4 percent in local-currency terms in April, the best monthly performance since July and the most of emerging markets monitored by the European Federation of Financial Analysts Societies and Bloomberg. Longer-term bonds are outperforming shorter-dated securities, with maturities of 10 years or longer returning 5.6 percent, the indexes show.
Near-zero interest rates in developed nations are prompting investors to search for better returns in emerging markets. The European Central Bank may cut borrowing costs this week, according to the median of economists in a Bloomberg survey, while the Federal Reserve will renew its commitment to bond-buying. Even after falling 53 basis points this month, South African 10-year yields remain the highest after Turkey and Russia among emerging-market nations in the region.
“Our foreign friends still think there is value in this market and that’s why they’re buying,” Mokgatla Madisha, who helps oversee the equivalent of about $1.3 billion as head of fixed-income investments at Argon Asset Management, said by phone from Cape Town yesterday. “Inflation is not going to be a problem in the next 12 months.”
Offshore investors have bought a net 12.3 billion rand ($1.4 billion) of South African bonds this month, bringing purchases this year to 26.5 billion rand, according to Johannesburg Stock Exchange data.
Yields on securities due December 2026 dropped four basis points, or 0.04 percentage point, to 6.73 percent at 4:30 p.m. in Johannesburg, the lowest on record on a closing basis, according to data compiled by Bloomberg. The extra yield investors receive for holding South African debt rather than Treasuries narrowed 36 basis points this month to 462 yesterday, near the least since January 2011, Bloomberg data shows.
“Disappointing global growth indicators and falling inflation in most of the major global economies will almost certainly prompt further policy easing,” Theuns de Wet, head of global markets research at Rand Merchant Bank in Johannesburg, said in an e-mailed response to questions yesterday. “Ongoing and expanding monetary and fiscal stimulus in most of the developed world should support risky currencies.”
Germany’s inflation rate slumped to 1.1 percent in April, the lowest level in more than 2 1/2 years in April, days before the European Central Bank is due to decide on interest rates.
The rand remains a threat to consumer prices and will probably push inflation past the upper limit of the central bank’s 3 percent to 6 percent target temporarily, Reserve Bank Governor Gill Marcus said April 19. The central bank has kept its benchmark interest rate at 5 percent, the lowest level in more than 30 years, since a half percentage-point reduction in July to boost the economy.
Slowing global growth may reduce demand for South Africa’s commodity exports, curbing an economic expansion and putting pressure on the nation’s current-account deficit, which swelled to 6.5 percent of gross domestic product in the fourth quarter, close to a four-year high.
“Global growth concerns and weak domestic data may trigger renewed bouts of selling pressure on the rand,” Bernd Berg, an emerging-markets strategist at Credit Suisse Group AG in Zurich, said in an e-mailed response to questions yesterday. That would “negatively impact the performance of South African local-currency bonds,” he said.
The rand weakened 0.1 percent to 9.0068 per dollar today, extending the currency’s decline this year to 5.9 percent, the most of 25 emerging-market currencies tracked by Bloomberg.
Inflation was 5.9 percent in March, unchanged from a month earlier, the government said April 17. That was less than the 6 percent median estimate in a Bloomberg survey.
“As soon as there is clarity on the inflation trajectory, and provided it is lower, the central bank will cut rates,” Madisha at Argon said. “Bond yields can go lower.”