S African shopping spree, strikes spur bond sales
Sunday, 22 July 2007
Lukanyo Mnyanda
Investors in South Africa's bond market are pushing debt prices lower as state workers win wage increases and the central bank raises interest rates to tame a spending spree by consumers.
The nation's bonds have lost 1.7 percent since the start of June, the fourth-worst performance among the 41 sovereign bond markets tracked by Merrill Lynch & Co. indexes, after Israel, Thailand and China.
South Africa needs foreign investors to buy about $210 million a day in stocks and bonds to plug its current-account deficit, which narrowed to 131 billion rand ($19 billion) in the first quarter of 2007 from a record 143 billion rand in the fourth quarter. The deficit also weakens the currency, increasing the cost of imports and adding to inflation.
``The market remains vulnerable,'' said Tim Haaf, an emerging-market fund manager in Munich at Pacific Investment Management Co., which runs the world's biggest bond fund. He declined to disclose his holdings. Newport Beach, California- based Pimco manages about $668 billion and is a unit of Munich- based insurer Allianz AG.
Global investors, who made up about 40 percent of trading in the country's bonds last year, cut holdings by 7.2 billion rand in the four weeks through July 13, according to the Bond Exchange of South Africa.
The country has outstanding government bonds worth an equivalent of $58 billion, according to the exchange. South African bonds have returned 0.05 percent this year, including reinvested interest, heading for their worst annual performance since Merrill started compiling the indexes in 1998.
The slide in South Africa's 13.5 percent note due September 2015 in the past month pushed the yield up by 30 basis points to 8.47 percent by 3:14 p.m. in Johannesburg. By comparison, yields on similar maturity Indonesian bonds rose 22 basis points, those on Brazilian debt rose 8 basis points and Indian yields declined 43 basis points. Yields move inversely to bond prices.
Consumer price gains in April breached the 6.0 percent target the government has set for Reserve Bank Governor Tito Mboweni for the first time in three years, reaching an annualized rate of 6.3 percent. The rate was 6.4 percent in May.
South Africa's government agreed to lift the wages of public workers including teachers and nurses by an average 7.5 percent to end a strike at some hospitals, clinics and immigration offices that lasted almost a month. Solidarity, a union representing skilled workers, said on July 10 that its members demanded a 15 percent increase from the country's mining companies.
Wage demands may ``push inflation much higher'' and force the central bank to raise its benchmark rate, known as the repurchase rate, Mboweni said June 8. The central bank lifted the rate by half a percentage point the day before to 9.5 percent, the first increase since December. The rate was increased four times in the second half of 2006 in increments of 50 points.
``Inflation went through the magic number,'' Chris Stals, 72, the central bank's governor from May 1989 to August 1999, said in a telephone interview from Pretoria. ``The market must expect that there will be further'' rate increases.
Traders are betting on at least another half percentage point increase in borrowing costs this year. The yield on the six-month forward rate agreement has jumped 23 basis points in the past month and was recently at 10.17 percent.
Rate increases will start to slow inflation, increasing the lure of local bond yields, according to Nyiko Mageza, a Johannesburg-based fixed-income strategist at Absa Capital, the investment banking unit of Barclays Plc's Absa Group Ltd.
``People got ahead of themselves,'' Mageza said. ``The rate hikes will contain inflation expectations.'' Yields will probably fall to about 8 percent this quarter, he said.
The pace of inflation in South Africa has more than doubled in two years as households that benefited from the end of apartheid borrowed at record levels to buy cars and build homes.
Household debt reached a record 73.8 percent of disposable income in the fourth quarter, up 40 percent from a year earlier and prompting Mboweni on June 8 to say that the ``madness'' must end.
``The risk is that they'll have to increase rates,'' said Peter Brooke, a fund manager in Cape Town at Old Mutual Investment Group South Africa, a unit of the U.K.'s third-biggest insurer.
On top of the prospect of higher rates, international fund managers risk foreign-exchange losses on their investments. Against the dollar, the South African rand was the most volatile among the 15 most-actively traded currencies in the past year, according to Bloomberg data.
The rand has weakened 0.2 percent in 2007 against the currencies of its major trading partners, a trade weighted index from Deutsche Bank AG based on central bank data shows.
``Investors are worried about the currency,'' said Leon Myburgh, Africa strategist in Johannesburg at Citigroup Inc., the largest U.S. bank. ``It could offset any gains you get on interest payments.''
Bloomberg
Investors in South Africa's bond market are pushing debt prices lower as state workers win wage increases and the central bank raises interest rates to tame a spending spree by consumers.
The nation's bonds have lost 1.7 percent since the start of June, the fourth-worst performance among the 41 sovereign bond markets tracked by Merrill Lynch & Co. indexes, after Israel, Thailand and China.
South Africa needs foreign investors to buy about $210 million a day in stocks and bonds to plug its current-account deficit, which narrowed to 131 billion rand ($19 billion) in the first quarter of 2007 from a record 143 billion rand in the fourth quarter. The deficit also weakens the currency, increasing the cost of imports and adding to inflation.
``The market remains vulnerable,'' said Tim Haaf, an emerging-market fund manager in Munich at Pacific Investment Management Co., which runs the world's biggest bond fund. He declined to disclose his holdings. Newport Beach, California- based Pimco manages about $668 billion and is a unit of Munich- based insurer Allianz AG.
Global investors, who made up about 40 percent of trading in the country's bonds last year, cut holdings by 7.2 billion rand in the four weeks through July 13, according to the Bond Exchange of South Africa.
The country has outstanding government bonds worth an equivalent of $58 billion, according to the exchange. South African bonds have returned 0.05 percent this year, including reinvested interest, heading for their worst annual performance since Merrill started compiling the indexes in 1998.
The slide in South Africa's 13.5 percent note due September 2015 in the past month pushed the yield up by 30 basis points to 8.47 percent by 3:14 p.m. in Johannesburg. By comparison, yields on similar maturity Indonesian bonds rose 22 basis points, those on Brazilian debt rose 8 basis points and Indian yields declined 43 basis points. Yields move inversely to bond prices.
Consumer price gains in April breached the 6.0 percent target the government has set for Reserve Bank Governor Tito Mboweni for the first time in three years, reaching an annualized rate of 6.3 percent. The rate was 6.4 percent in May.
South Africa's government agreed to lift the wages of public workers including teachers and nurses by an average 7.5 percent to end a strike at some hospitals, clinics and immigration offices that lasted almost a month. Solidarity, a union representing skilled workers, said on July 10 that its members demanded a 15 percent increase from the country's mining companies.
Wage demands may ``push inflation much higher'' and force the central bank to raise its benchmark rate, known as the repurchase rate, Mboweni said June 8. The central bank lifted the rate by half a percentage point the day before to 9.5 percent, the first increase since December. The rate was increased four times in the second half of 2006 in increments of 50 points.
``Inflation went through the magic number,'' Chris Stals, 72, the central bank's governor from May 1989 to August 1999, said in a telephone interview from Pretoria. ``The market must expect that there will be further'' rate increases.
Traders are betting on at least another half percentage point increase in borrowing costs this year. The yield on the six-month forward rate agreement has jumped 23 basis points in the past month and was recently at 10.17 percent.
Rate increases will start to slow inflation, increasing the lure of local bond yields, according to Nyiko Mageza, a Johannesburg-based fixed-income strategist at Absa Capital, the investment banking unit of Barclays Plc's Absa Group Ltd.
``People got ahead of themselves,'' Mageza said. ``The rate hikes will contain inflation expectations.'' Yields will probably fall to about 8 percent this quarter, he said.
The pace of inflation in South Africa has more than doubled in two years as households that benefited from the end of apartheid borrowed at record levels to buy cars and build homes.
Household debt reached a record 73.8 percent of disposable income in the fourth quarter, up 40 percent from a year earlier and prompting Mboweni on June 8 to say that the ``madness'' must end.
``The risk is that they'll have to increase rates,'' said Peter Brooke, a fund manager in Cape Town at Old Mutual Investment Group South Africa, a unit of the U.K.'s third-biggest insurer.
On top of the prospect of higher rates, international fund managers risk foreign-exchange losses on their investments. Against the dollar, the South African rand was the most volatile among the 15 most-actively traded currencies in the past year, according to Bloomberg data.
The rand has weakened 0.2 percent in 2007 against the currencies of its major trading partners, a trade weighted index from Deutsche Bank AG based on central bank data shows.
``Investors are worried about the currency,'' said Leon Myburgh, Africa strategist in Johannesburg at Citigroup Inc., the largest U.S. bank. ``It could offset any gains you get on interest payments.''
Bloomberg