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South Africa's 10-year bond yield increased after sell-off

South African 10-Year Bond Yield

Source: South Africa National Treasury

The South African 10Y government bond has a 11.25% yield. Indeed, the yield increased due to a massive sell-off of 1 billion Rand of its 2031, 2046, and 2050 inflation-linked bonds at auction. The central bank rate is currently at 8.25%. According to the Standard & Poor’s agency, the South African credit rating is BB-, and the current 5-year credit default swap quotation is 313.76, which implied a probability of default of 5.32%.

The local currency, the South African Rand, lost over 7% against the greenback since the start of the month and more than 15% since the beginning of the year. Africa’s most industrialized economy faces its worst rolling blackouts, which are further exacerbating persistent high inflation and pushing the central bank to continue to hike interest rates.

It is important to understand that if there is an expectation of higher inflation in the future, bond investors may demand higher yields to compensate for the erosion of purchasing power. Central bank actions, such as raising interest rates or signaling a more hawkish stance on monetary policy, can influence inflation expectations and lead to higher bond yields. When the bond yield increases, its price falls.

Uncertainty around political events, government policies, or geopolitical tensions have also affected bond yields. If investors perceive higher risks or lack confidence in the stability of a country's political and policy environment, they may demand higher yields as compensation. Indeed, the drop in demand comes even as government-bond yields across the curve yield at the highest levels since the start of the pandemic three years ago. Investor sentiment on Africa’s most industrialized economy has soured amid persistent energy shortages and a deteriorating economic outlook, besides external risks over China’s patchy recovery and tightening monetary conditions.

South African assets dropped Monday after the US accused the nation of arming Russia. Geopolitical concerns could weigh on bond performance, Societe Generale said.

Normally, longer-duration interest rates are higher than short-duration. So, the yield curve normally slopes upward as the duration increases. For this reason, the spread (i.e. the yield difference) between a longer and a shorter bond should be positive. If not, the yield curve can be flat or inverted.

The dollar slightly weakened last Tuesday and was down 0.144% to 104.1 against a basket of global currencies. According to Warren Venketas, the dollar-rand exchange rate is very much at the mercy of the U.S. at present and will continue to do so until there is more clarity.


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