Top Carry Trade Isn't Dead Yet as Traders Stock Up on Rand Bonds

  • Political crisis may be short-lived, options market suggests
  • Bond inflows by overseas investors reaches nine-month high

There may be life in the dollar-rand carry trade yet.

Borrowing in dollars and buying assets denominated in the South African currency had given investors a 12 percent return until last week, when President Jacob Zuma rekindled a political crisis, sending the rand tumbling more than 5 percent and almost halving the carry returns.

Yet daily bond-market inflows hit a nine-month high on Tuesday, evidence that some investors think now is the time to get on the trade.

It all hinges on the rand. Forward traders are betting on the currency declining further in the next 12 months, sending its implied yield to the biggest three-day increase since 2015. That means carry traders could lose a greater portion of their gains to rand’s weakness when they repatriate their profits.

Options traders, on the other hand, are betting the impact of the political turmoil will blow over. While one-week implied volatility spiked to a four-month high this week, the rise in 12-month contracts was subdued. 

Even as the rand slumped, foreign investors were piling into government debt. Net inflows on Tuesday reached 4.9 billion rand ($375 million), the most since June, according to JSE Ltd. data. Demand at the weekly government fixed-rate bond auction outstripped supply by a factor of six. That’s a bet the rand will consolidate, according to Rand Merchant Bank.

“Real-money players started seeing this as a great opportunity to buy bonds,” Michelle Wohlberg, a fixed-income trader at the Johannesburg-based investment bank, said in a note Wednesday. Sergio Trigo Paz, the London-based head of emerging-market debt at BlackRock Inc., which oversees $1.6 trillion in fixed income globally, said Wednesday he’s sticking with South African bonds and that investors are being compensated for the nation’s risk.

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