Johannesburg – The South African bond market was weaker in midday trade on Wednesday despite a positive ruling of the German Constitutional Court on the European Stability Mechanism (ESM).
“The bond market looks to have been over-bought and we are now seeing a retraction irrespective of what overseas bonds yields do or the rand does‚” a local bond trader said.
At 11:40‚ the benchmark R157 bond was trading at 5.460% from 5.360% at the previous close. The R207 was bid at 6.485% and offered at 6.465% from Tuesday’s close of 6.370%‚ and the R186 was trading at 7.365% from 7.280% at Tuesday’s close.
The rand was bid at R8.1977 after reaching a best level of R8.1357 from Tuesday’s close of R8.1711.
The National Treasury will auction R600m worth of R2023 bonds‚ R900m worth of R214 bonds and R600m worth of R2048 bonds on September 18.
Dow Jones Newswires reported that Germany's highest court on Wednesday threw out attempts to delay the country's ratification of the ESM and the so-called "fiscal pact"‚ but placed strict conditions on expanding it beyond its foreseen limits.
The ruling removes a major question mark over two crucial elements of the eurozone's plan to master its debt crisis. It paves the way for the creation of a permanent bailout mechanism in the region that will be able to provide large-scale financial assistance to heavily indebted eurozone economies.
European financial markets reacted enthusiastically to the decision. The euro rose above the level of $1.29 for the first time in four months‚ while the Euro Stoxx 50 index rose 0.8%‚ led by financial stocks.
Banking stocks are particularly sensitive to the implications of the ruling for their holdings of government bonds.
Government bond yields‚ which reflect the risk premium that investors attach to those countries‚ also fell in the wake of the ruling. The yields on 10-year Italian bonds fell to a six-month low of just below 5%‚ while those on 10-year Spanish bonds fell by nine basis points to 5.56%.
The court said Germany's liabilities through the €500bn bailout fund mustn't be increased beyond the agreed €190bn‚ without the express consent of the German parliament‚ which it said must be guaranteed sufficient information on which to base its decision.
"The Federal Republic of Germany must express that it does not wish to be bound by the ESM Treaty in its entirety if the reservations made by it should prove to be ineffective‚" the court's president Andreas Vosskuhle told a packed courtroom.
The court also said it had not made any decision on whether sovereign bond purchases on the secondary market by the European Central Bank (ECB) a mechanism it intends to use to lower the borrowing costs for financially troubled states - would infringe the ESM treaty as written.
It said it would consider the ECB's planned “Outright Monetary Transactions” in its full review of the legality of the ESM and the Fiscal Pact‚ which is expected to be completed in December.
However‚ the court made clear in its language that it would not accept any interpretation of the ESM Treaty that allowed the bail-out fund to borrow directly from the ECB.
Eurozone policymakers have flirted with giving the ESM such powers in order to increase its available fire power‚ but the ECB itself‚ and a number of governments including Germany's‚ have expressed strong objections.
The ESM and fiscal pact are highly contentious throughout Europe because they represent a profound and permanent shift away from the principle of national sovereignty in the realm of budgetary policy. The fiscal pact restricts the rights of eurozone member states to run budget deficits‚ allowing multilateral supervision from the European Commission and the rest of the eurozone.
The ESM‚ for its part‚ foresees the creation of a €500bn fund for bailing out eurozone members. The latter has given rise to widespread fears in Germany of German taxpayers being forced to assume liability for other countries' debts.
Foreigners purchased a net R2.998bn of South African bonds including repo transactions on Tuesday after net sales of R3.211bn of local bonds on Monday‚ data released by the JSE shows.
Nominal cumulative volume was R201.813bn on Tuesday from R72.979bn on Monday.
Foreigners were net buyers of R2.562bn of local bonds excluding repo transactions on Tuesday after net sales of R3.259bn of local bonds on Monday.
For the year to date foreigners have been net buyers of R73.541bn of local bonds‚ excluding repo transactions. In 2011 they were net buyers of R47.359bn worth of local bonds‚ excluding repo transactions.
In the year to date foreigners have been net buyers of R73.880bn of local bonds including repo transactions. In 2011 they bought R37.501bn worth of local bonds.