Mar 29, 2020
The SA bond market has been under significant pressure over the last month, with the positive budget a very distant memory, leaving 10year yields 300bps higher at 11.75%. Part of the repricing is a legitimate fundamental deterioration due to the worsening growth outlook and its negative impact on an already strained fiscus, but by far the most significant part of the repricing has been a liquidity preference emanating from foreign bond holders.
The fundamental deterioration has been mitigated to some extent by the SARB cutting 100bps two weeks ago. But the liquidity preference selling (because it is price insensitive) has swamped the market, resulting in margin calls for local managers, which resulted in further selling.
After extensive engagement with market participants, the SARB increased and extended the tenor of their repo operations and took the historic step to support SAGBs in the secondary market. This is a monetary policy implementation reaction and is designed to facilitate the transmission of monetary policy, it is not QE or monetization of the deficit.
Whilst there is a reasonable chance of some weakness in the days ahead, policy actions should provide an underpin to the bond market in the coming weeks – particularly if the bulk of foreign outflows due to the downgrade have already occurred. The longer-term path of SA bonds will be determined by the government’s policy actions.