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Bonds gained and the rand rallied after South Africa’s exit from a fixed-income index tracked by funds overseeing trillions of dollars was finalised, removing a key risk overhanging the country’s markets.
The country’s debt was officially ejected from the FTSE World Government Bond Index - which tracks investment-grade debt and is followed by $3 trillion of funds - on April 30 after South Africa received a full deck of junk ratings following a cut by Moody’s Investors Service in March.
Usually, that would have resulted in an immediate exit for the bonds, but the expulsion was postponed until the end of April given market volatility and liquidity constraints caused by the coronavirus pandemic.
Investors pre-positioned
South Africa had a 0.44% weighting in the index, and with tracking funds having to divest, analysts have estimates capital outflows of between $2 billion and $10 billion. Yet foreign investors were net buyers of South African bonds in the four days leading up to the WGBI rebalancing, while yields on benchmark 10-year securities fell more than 60 basis points.
"Broadly speaking, investors were pre-positioned," said Kieran Curtis, a London-based director of investment at Aberdeen Asset Management. "The Moody’s downgrade had been such a long time coming that many active fund managers will either have sold, or will have the flexibility to continue to own and presumably are comfortable with that."
Sales by passive funds are probably almost complete, though some funds may allow a longer period to re-balance their portfolios, Curtis said. Outflows from South African bonds reached R60 billion in the four months through April 30, according to JSE data, with foreign investors reducing their holdings to 33% of the debt, from as high as 43% two years ago.
The rand advanced as much as 1.1% before trading 0.6% stronger at 18.6944 per dollar by 4:31 pm in Johannesburg, rebounding after a decline of 3.4% in the previous two sessions. Yields on the most-liquid 2026 local-currency bond fell a fifth day, down nine basis points to 8.37%, well below the five-year average of 8.68%. Yields on 10-year notes declined 10 basis points to 10.21%.
