South Africa Tests Investor Appetite With Its Biggest Bond Auction Yet

Updated on
  • Treasury offering 3.3b rand of local-currency bonds on Tuesday
  • 10-year yield has jumped 30 basis points since last debt sale

South Africa’s widening budget deficit is going to cost it. Just how much, the Treasury will find out when it holds its biggest auction yet of local-currency debt on Tuesday.

Benchmark 10-year yields have climbed more than 60 basis points since Oct. 24, the day before Finance Minister Malusi Gigaba said the government will need to raise an additional 122 billion rand ($8.4 billion) of debt over the next three years to plug a yawning fiscal shortfall. That means increasing the amount of notes offered at the weekly fixed-rate auction to 3.3 billion rand going forward from 2.65 billion rand previously.

With Moody’s Investors Service and S&P Global Ratings preparing to review South Africa’s credit assessments next week, investors are already on edge. To make matters worse, 10-year yields jumped on Monday to their highest since 2016 after the head of the Treasury’s budget office, Michael Sachs, resigned amid speculation that President Jacob Zuma is plotting to override the Treasury to implement a costly plan for free university education.

While a failed auction is unlikely -- the eight so-called primary dealers who make a market in government bonds are obliged to buy the debt on offer -- yields will probably have to rise if orders decline. Demand at last week’s sale fell to 2.7 times the amount on offer, compared with 3.9 times the week before. Benchmark yields have climbed about 30 basis points since then. The Treasury plans to sell debt maturing in 2031, 2037, 2044 and 2048 on Tuesday.

“The market will adjust to levels needed to clear the auction,” said Rashaad Tayob, a portfolio manager at Abax Investments Ltd., which oversees about 90 billion rand. “With increased size and greater uncertainty on the fiscal side, I would expect more auctions to have negative surprises.”

S&P and Fitch Ratings stripped South Africa of its investment-grade foreign-currency assessment in April, citing concerns about policy uncertainty and lackluster growth, just days after Gigaba replaced Pravin Gordhan as finance minister. The deteriorating debt trajectory threatens to trigger a downgrade of the local-currency debt rating to junk by S&P and Moody’s. Fitch already assesses the local-currency debt as sub-investment.

The yield on government bonds maturing in December 2026 climbed one basis point to 9.48 percent by 9:55 a.m. in Johannesburg after rising 11 points on Monday. The rand gained 0.1 percent to 14.4519 per dollar, paring its drop this month to 2.3 percent.

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