Africa Coronavirus Finance Opinion South Africa

Side Effect: South Africa increasing bond’s yield

If you are not a crazy about the financial market, chances are that the information you hear is very select of what is going on.

Amid such conditions that the world faces we still do not have a clear picture of what goes on in African stocks and bonds. This past week however something massive happened to South Africa’s 10-year bonds, the numbers have spiked over 12% creating an all time record between the United States’ bond value and SA’s.

To understand why SA’s bonds should be looked upon, we need to see what an increase in the yield implies and does to bonds. When the bond’s yield increases, the interest rate at which the issuer needs to pay back, in this case the SA government, increases.

Meaning that the quantity needed to be paid back at the end of the “loan‘ increases the higher the bond yield. In 2019, SA yields were at an average of 8%, following the increase of 50%, this means that interest rates should see an increase of also 50%.

“The spike in South African bond yields reflects massive global uncertainty, with investors dumping everything perceived as risky”, says investment strategist at Old Mutual Multi-Managers, Izak Odendaal, in an interview to Business Insider South Africa. “The difference is that their starting point is lower. Because of worries around our fiscal situation and the risk of a Moody’s downgrade, our bond yields never declined in line with our peer group in 2019” he added.

Some investors believe that the disparity in bond values could mean that SA is issuing bonds at very low values in comparison to the value that bonds are being issued in the US. However this spike in yields has been seen in the past two weeks in countries deeply affected by the new Covid-19 outbreak. The increase in yields could represent that investors are looking more towards investing in the long-run and later returns than more immediate stock trading.

What would be considered a major punch to the gut in regular times now could be seen as irrelevant perhaps. Moody’s, responsible for issuing credit ratings, is considered to drop SA’s rating to “junk” in the coming days, and yet lenders are not worried about the rating.

It is almost as if the Covid-19 has brought disregard and a shift in the rules to investments and how possible investors might disregard ratings. The downgrade in rating also poses many negative outcomes, one of them the fact that some international funds are not allowed to invest in junk bonds, and are expected to trigger sales of SA bonds.

Time will tell.

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