In World's Manic Search for Yield, South Africa Fails to Excite

  • Latest bond issue draws less demand than Ukraine, Tajikistan
  • Return not enough to compensate for risks: SEB’s Hammerlund

Amidst a clamor for yield which recently saw investors lapping up bonds from a country some couldn’t even place on an Asian map, South Africa’s latest debt sale had a lukewarm reception.

The nation had to pay more to sell 10-year Eurobonds Tuesday than it did on 12-year debt last year, and managed to attract only $2.1 billion in bids for the $1 billion offered. By comparison, Ukraine received bids for three times the $3 billion it offered in its first foray into the market since Russia invaded the Crimea in 2014, while Tajikistan got $3.1 billion of orders in a debut sale of $500 million of securities.

South Africa’s $1 billion of 10-year debt was sold to yield 4.85 percent, or 50 basis points more than the country paid on $2 billion of 12-year securities a year ago. It also issued $1.5 billion of 30-year notes at a yield of 5.65 percent, for which investors placed $3.2 billion of orders.

The relatively muted demand shows how political risks have eroded South Africa’s standing in the eyes of investors. The country’s risk premium climbed when President Jacob Zuma fired his respected finance minister, Pravin Gordhan, after recalling him from an investor road show in the U.K. in March, sparking the downgrade to junk from two of three major rating companies in April.

While the country’s dollar yields traded somewhat in line with the emerging-market average before then, they opened up a spread of as much as 62 basis points as investors reassessed the risks of investing in a country racked by political turmoil and allegations of corruption. Adding to the uncertainty is a leadership battle in the ruling African National Congress as it prepares to elect a new party president.

“Investors are concerned about the political turmoil surrounding the finance ministry and also the uncertainty surrounding the ANC itself in the upcoming conference in December,” Per Hammerlund, chief emerging-market strategist at SEB SA in Stockholm, said by phone. “Investors would simply require more yield to go into the turmoil of the South African uncertainty.”

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