Bond buyers deterred by Fed rate outlook

Foreigners are set to keep selling South African bonds in 2015 as the prospect of higher US interest rates boosts demand for dollar assets.

Investors from outside Africa’s second-biggest economy offloaded more rand-denominated debt than they bought last year for the first time since 2008, according to Johannesburg Stock Exchange Data. Local-currency bonds lost 0.1% for dollar investors in 2014, compared with the 3.9% average return among 31 emerging markets tracked by Bloomberg indexes.

Demand for developing-nation debt declined in 2014 as the Federal Reserve reduced asset purchases and signaled it may raise interest rates as the US economy recovers from the 2008 financial crisis. South Africa’s budget and current-account deficits weighed on credit ratings, reducing the attraction of the nation’s debt as the rand extended its annual losing streak to the longest since 2001.

“The flow situation next year will likely be highly volatile,” Peter Attard Montalto, a London-based economist at Nomura International, said in an emailed response to questions on December 31. “Fed hiking from the third quarter will mean less money flowing into emerging-markets.”

Foreign investors sold a net R5.9-billion of South African bonds last year, according to JSE data compiled by Bloomberg, compared with R25.8-billion rand of net purchases in 2013.

Earnings cut 
South African government bonds returned 10% in rand terms in 2014, according to Bank of America Merrill Lynch indexes, the currency’s 9.3% depreciation cut earnings for dollar investors. Yields on benchmark bonds due December 2026 were unchanged by 9.45am in Johannesburg after rising four basis points on January 2 to 8% .

The yield may climb to 8.14% by the end of March and as high as 8.22% in the third quarter, according to the weighted average of six economists in a Bloomberg survey.

Policy makers at the South African Reserve Bank have held the benchmark interest rate since raising it to 5.75% in July. The economy probably grew 1.4% last year after strikes in the platinum-mining and manufacturing industries curbed output, according to government estimates. While growth may be 2.5% this year, the slide in the rand risks rekindling inflation, which remains above its five-year average even after slowing to 5.8% last month from as high as 6.6% in June.

South Africa avoided a third downgrade this year after Fitch Ratings kept its assessment at BBB, the second-lowest investment grade, on December 12. The company said fiscal tightening plans laid out in October should stabilise debt ratios even as it maintain a negative outlook. Fitch is in line with Moody’s Investors Service and one step above Standard & Poor’s, which kept a stable outlook on the nation’s debt the same day.

“A structurally weak South Africa” will struggle to attract investment as competition for capital increases, Montalto said. – Bloomberg

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