Picture: THINKSTOCK
Picture: THINKSTOCK

DESPITE a disappointing South African bond auction on Tuesday, bond traders and analysts say it is not a clear indication that foreigners have lost interest in government bonds.

Forthcoming bond auctions will provide a clearer picture of the situation.

The bond market was weaker on the day, with much of this weakness materialising following the auction. The benchmark R186 ended the day returning a yield of 9.31%, having ended last week on a yield of 9.16%.

ETM Analytics analyst Ricardo da Camara said Tuesday’s vanilla auction saw total nominal bids fall to their lowest level since an auction on December 8 last year. The bids of R4.54bn were close to 40% below the average 2016 bid total so far, of R7.341bn.

There was evidence that this drop had to do with the seasonality of the Human Rights Day public holiday on Monday and the approaching market holidays over Easter that tended to suppress market depth and liquidity, as some market participants took a week-long break, Mr Da Camara said.

It might be too soon to tell whether the dip in interest was a function of lower market liquidity, or deteriorating sentiment towards local government bonds, but forthcoming auctions next week and thereafter should provide greater clarity in this regard, he said.

Rand Merchant Bank (RMB) analysts said the majority of the bond weakness was again concentrated in longer-dated bonds, with the selloff sparked by the "very poor auction performance". RMB did, however, say the combination of bonds on offer may have hindered auction performance.

The best performing bond was, in fact, the shorter-dated R2,032, which cleared at mark to market and also attracted the highest bid-to-cover ratio. The other bonds had all cleared well above market, with the worst-performing stock being the R2,044, the bank said.

While flow was generally poor, foreign buying was noted towards the end of the day, primarily in the belly of the curve. These purchases should help to keep a cap on yields, and might have increased the curve steepening that it had seen recently, the bank said.

But Stanlib director of retail investing Paul Hansen said South African bonds were being buffeted by the political scandals doing the rounds, especially the struggles of the minister of finance, with Moody’s rating agency in town, and watching closely.

The high inflation number of 7% for January, which was expected, was hurting too, due to the drought and rapidly rising food prices. "Bonds do not like rising inflation and rand volatility is not helping either," Mr Hansen said. "So, one can fully understand hesitation on the part of both foreign and local buyers of our bonds."

Foreigners have been relatively big buyers of South African bonds since the beginning of this year, with net purchases standing at R18.54bn at the end of last week.

In the same period, however, foreigners have been net sellers of South African equities amounting to R13.01bn.

Another analyst, who could not be named in line with his company’s policy, said that last Friday had seen a liquidation of some long-dated bonds — R2,048s — that cleared to local primary dealers. Because this was a short week and market participants were scarce, it was not possible to clear the Friday flow before the auction. This had resulted in a poor Tuesday auction uptake, compounded by negative political news flow domestically, the bombings in Europe, and disappointing inflation data released on Wednesday morning.

He said bonds seemed a little more stable, as there was some offshore buying interest late on Tuesday. There were also large coupon payments due at the end of the month, totalling about R8bn. "This should help keep bond yields contained and limit further weakness," the analyst said.

South African bonds were stable on Wednesday, after trading slightly weaker in intraday trade due to worse than expected February inflation data. Inflation’s sharp acceleration to 7% year-on-year in February, from 6.2% in January, supports the Reserve Bank’s decision to raise interest rates, both in January and this month. The 7% increase in the consumer price index was the highest rate since May 2009.

On Wednesday afternoon, the benchmark R186 bond was bid at 9.31%, and offered at 9.29%, from Tuesday’s close of 9.31%.

The middle-dated R207 was bid at 8.79% and offered at 8.785% from a previous close of 8.8%.

RMB fixed income strategist Carmen Nel said the jump in inflation was substantial, and it reinforced the Reserve Bank’s hawkish stance on inflation, given the risk from rapidly rising food prices to second-round effects.