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Cape Town - While foreign investors have been selling their holdings of South African bonds, some domestic money managers say now is the time to be buying rand debt.
The 55% plunge in crude oil since last year’s peak in June is easing inflationary pressures, which means the central bank can hold off raising interest rates, according to Abri du Plessis at Gryphon Asset Management. Yields on rand bonds maturing in December 2026 tumbled 28 basis points to 7.72% this week, and the rate may drop to 7.5% in coming months, he said.
The rand is among emerging-market currencies that have suffered over the past six months as foreigners pull cash from developing nations in anticipation of higher US interest rates. That is enhancing the allure of government bonds for South African investors as sentiment improves amid falling gasoline prices and inflation expectations.
“For foreign investors, the rand is always a concern because it influences their returns,” Du Plessis, who helps manage $460m at Gryphon in Cape Town, said by phone yesterday. “From a local perspective, this is a good opportunity. We have more of a focus on inflation.”
The difference in yield of five-year fixed-rate debt over similar-maturity inflation-linked bonds, a measure of investor expectations of annual inflation over the period, dropped 88 basis points since the end of June to 5.82 percentage points yesterday. The consumer inflation rate dropped to 5.8% in November, remaining within the central bank’s 3% to 6% target range for a third straight month.
Tighter Policy
Forward-rate agreements, used to speculate on borrowing costs, are predicting 66 basis points of rate increases over the next year, down from 1.16 percentage points as recently as October, data compiled by Bloomberg show.
Investors from outside Africa’s second-biggest economy offloaded more local-currency debt than they bought last year for the first time since 2008, selling a net R5.9bn of notes, according to JSE data.
An interest-rate increase “might not even happen,” said Du Plessis, who recommended buying long-dated bonds in May, which returned almost 10% since then.
Policy makers at the South African Reserve Bank have held the benchmark rate since raising it to 5.75% in July. The economy probably grew 1.4% last year after mining and manufacturing strikes curbed output, according to government estimates. While growth may recover to 2.5% this year, the slide in the rand risks rekindling inflation, which remains above its five-year average.
The rand gained 0.1% to 11.6976 per dollar as of 09:43 in Johannesburg. It has dropped 9% over the past 12 months.
“Unless there’s a massive blowout in the rand, the Reserve Bank has got scope to keep rates flat,” Mohammed Nalla, head of strategic research at Nedbank, said by phone from Johannesburg yesterday.
