South African Dollar Yields Fall to Seven-Month Low on S&P Stay

  • S&P holds South Africa’s credit rating at investment grade
  • Rand bonds advance with currency as asset prices realign

South African bonds gained, with yields on benchmark dollar securities falling to seven-month lows, after the country escaped a downgrade that would have left its debt rated so-called junk.

Yields on the country’s $2 billion of Eurobonds due Sept. 2025 dropped 8 basis points to 4.63 percent by 4:50 p.m. in London, the lowest since October 28, after S&P Global Ratings affirmed South Africa’s credit rating at BBB- on Friday, while the cost of insuring the debt against default for five years using credit-default swaps fell to the lowest in more than a month.

S&P’s decision came at a time of increasing investor concern over South Africa’s internal policy disputes, heightened by President Jacob Zuma’s aborted attempt six months ago to name a little-known lawmaker as finance minister, sending the rand and bonds tumbling. Further gains may bring the currency back to levels in line with investment-rated peers after a 10 percent sell-off in May on expectations of a downgrade, according to Warrick Butler, head of emerging-market trading at Standard Bank in Johannesburg.

Yields on benchmark rand bonds due December 2026 dropped 14 basis points, the most since March 13, to 9.06 percent, adding to an 11-point decline on Friday. The yield may move below 9 percent “on a more sustainable basis,” Standard Bank Group Ltd. said in a research note on Monday. 

The rand gained as much as 1.2 percent to 14.9091 per dollar before paring the advance to trade at 14.9531, the strongest closing level since May 6. The currency strengthened 3.1 percent on Friday, buoyed by weaker-than-expected U.S. jobs data that boosted optimism the Federal Reserve would delay increasing borrowing costs.

Rand Realignment

“I would expect this trend to continue,” with the 200-day moving average of 14.85 per dollar the next target, Butler said. “Below that and we head off to the April double-bottom lows of 14.10 and 14.15, which will realign the rand with other emerging markets again,” he said.

The CDS spread should also “decline steadily along with our South African government bond yields as real-money investors look for value again,” Butler said.

Foreign investors bought a net 2.3 billion rand ($153 million) of local bonds Friday, bringing the week’s inflows to 8.3 billion rand, compared with 1.7 billion rand the week ending May 27, according to the Johannesburg Stock Exchange. Friday was the ninth day of inflows, the longest streak since April last year. Foreigners also purchased a net 4.4 billion rand of equities Friday, the most since March 2.

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