Steady rates, rand to buoy South African bonds despite “junk” threat -investors

By Mfuneko Toyana

JOHANNESBURG (Reuters) – Yield-hungry investors look set to boost demand for South African bonds despite the threat of ratings downgrades to “junk”, as the cycle of interest rate hikes ends, the rand recovers and inflation calms down, analysts say.

The Treasury is battling to avoid downgrades from Moody’s, Fitch and S&P this year, with the agencies keen to see Pretoria’s commitment to fiscal prudence. [nL8N1CW53D]

But Lesiba Mothata, chief economist at Investment Solutions, which manages more than 330 billion rand ($23.15 billion) worth of assets said the hunt for yield will outweigh that problem.

“Investors are lustful for yield globally,” he said.

“So, even if it gets downgraded it can easily be seen as a fallen angel, which is why the word ‘junk’ is a misnomer.”

Analysts said demand for high-yielding bonds, which tends to increase when interest rates and inflation fall, was likely to be triggered should the central bank hold rates on Thursday. [nJ8N1BH01V]

All but one of 33 economists surveyed by Reuters forecast rates to remain unchanged. [nL4N1DI2ZP]

The central bank has hinted it may have reached the end of its tightening cycle having raised rates by a cumulative 200 basis points since early 2014 to 7 percent, but said the bar for any future rate cuts was very high. [nL8N1BY3MJ]

With the 10-year paper yielding close to 9 percent, analysts say investors are likely to return to the debt market after selling off more than 12 billion rand in November. [nL8N1DM0X1]

Old Mutual investment strategist, Izak Odendaal, whose firm manages more than 100 billion rand in assets, said: “Our yields are attractive in a global context relative to developed markets and most major emerging markets.”

He said that Pretoria’s commitment to fiscal consolidation was also “a positive for bonds”.

On Wednesday, markets were pricing in a 29-percent probability of 25-basis-point (bps) hike by the central bank on Thursday, and a 15-percent chance of 50 bps increase, according to Thomson Reuters and bourse data.

The weaker rand and a severe drought that affected food production have kept inflation above the upper end of the bank’s target of between 3 and 6 percent.

But rains have returned and the rand has gained almost 3 percent against the dollar in the last three sessions and more than 20-percent compared with January’s low of 17.995.

Investec chief economist Annabel Bishop sees the rand averaging 13.8400/dollar in 2017, 12.4800 in 2018, and 11.4900 by 2019, boosted mainly by a rebound in global commodity prices, which form a large part of South Africa’s export revenue.

($1 = 14.2577 rand)

(Editing by James Macharia and Louise Ireland)