Borrowing costs dip after spiking

Johannesburg - Government borrowing costs last week and this week shot up after the shock of President Jacob Zuma’s Cabinet reshuffle, but by Friday’s auction of bonds, some of the pressure had apparently dissipated, despite S&P Global’s move to downgrade the country’s foreign currency debt to “junk” status.

One of the direct measures of the effects of the past two weeks is Treasury’s weekly auctions of new fixed-rate bonds, held on Tuesdays, and inflation-linked bonds on Fridays.

The yield Treasury achieves on its bond auctions is what actually determines the cost of government’s debt.

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On Friday, the auction found buyers for all bonds on offer, and the “clearing yield” on the I2033 inflation-linked bond dropped back slightly to 2.35% plus inflation.

This compares with 2.50% plus inflation the previous week, when the auction failed to find buyers for all bonds on offer.

On the previous Friday, of the R650 million in inflation-linked bonds offered, only R230 million were sold – at noticeably higher yields than at auctions of the same bonds earlier in the year.

The preceding auction got a yield of 2.16%.

The “clearing yield” is the highest yield actually agreed to in the auction.

Chris Gilmour, an investment analyst at Barclays Wealth and Investment Management, said: “Last Friday, government only managed to attract a small portion of what it was looking for.

"It will undoubtedly have to sweeten the yield to get its required funding, and that will have ripple effects through the entire economy, including the banking sector.”

On Tuesday, an auction of South Africa’s benchmark 10-year “R186” bonds required a clearing yield of up to 9.04% to sell all the bonds on offer.

A week earlier, an auction of the same bonds cleared with the highest yield at only 8.735%.

Late last year, these bonds were auctioned at a clearing yield of 8.57%.