/ 8 August 2019

Bond auction underwhelms

Balancing the books: Finance Minister Tito Mboweni has tabled a special appropriations bill to help to bail out Eskom.
Balancing the books: Finance Minister Tito Mboweni has his work out for him. (Sumaya Hisham/Reuters)



Initial results from the first government bond auction after the treasury announced it would be increasing debt issuance to fund the Eskom bailout, amid other problems, were underwhelming.

The auction, held on Tuesday, pointed to a decline in demand for the government’s fixed-income debt compared with the previous two months — which analysts believe could be down to the increased issuance, along with investor uncertainty about developments in the South African market, as well as globally.

The bid-to-cover ratio on the benchmark R186 bond came in at 2.01, while it came in at 2.01 and 2.6 for the R2030 and the R2035 bonds, respectively — marginally lower than comparable figures for recent months according to Varushka Singh, a fixed-income and currency strategist at Rand Merchant Bank.

The bid-to-cover ratio is a proxy for market demand for these instruments. The bid-to-cover ratios for these bonds in June and July has averaged between 2.5 and 4.2, she noted. The outcome was somewhat below market expectations,given the increases in yields that had preceded the auction, said Singh. Bond yields move inversely to their price, which means as yields increase, prices decline, making them more attractive to buyers.

The week ahead of the auction, between July 29 and August 2, the R186 had increased by 5.5 basis points, the R2030 by 2.6 basis points, and the R2035 by 0.5 basis points.

But the outcome is not surprising, given the increased issuance and recent uncertainty around developments in the South African market, Singh noted.

Another important factor that may have contributed to the decline in demand was the movement of the market during the auction. The yields for the bonds on offer started out at higher levels — meaning bond prices were lower — but they decreased during the auction, sending prices up.

Opening bond yield levels at the start of the day of the August 6 auction were 8.42% (R186), 9.086% (R2030) and 9.685% (R2035); 10 minutes before the end of the auction, levels were 8.38% (R186), 9.055% (R2030) and 9.665% (R2035). This would have worked against participants in the auction, Singh noted.

Last week the treasury announced it would increase its debt issuance given the decision to fast-track support to power utility Eskom, as well as expected declines in government tax revenues, which had resulted in the government needing to revise its funding strategy.

It said it would increase its fixed-rate bond auction amount by R1.2-billion to R4.5-billion and its inflation-linked bond auction amount by R280-million to reach R1-billion. The increases for the fixed-rate auction took effect on Tuesday, while the increase for inflation-linked bonds will take effect from August 16.

The announcement came in the same week that Eskom reported dismal results, announcing that its losses had reached R21-billion and its debt levels had risen to R447-billion.

To sustain Eskom, Finance Minister Tito Mboweni tabled a special appropriations bill that will effectively front-load some of the R230-billion earmarked for Eskom in the next decade, bringing this support forward. In addition to the R23-billion Eskom had already been allocated for the 2019-20 and 2020-21 financial years, the bill makes provision for a further R26-billion and R33-billion in each year, respectively.

Together with expectations of revenue declines thanks to poor economic growth, the deterioration in the government’s finances has heightened expectations that the country will be downgraded by credit ratings agency Moody’s to sub-investment grade. Fellow ratings agency Fitch — which already rates South African debt at junk — recently announced that it had revised its outlook on South Africa to negative from stable, citing concerns over government’s widening budget deficit and rising debt to gross domestic product levels, thanks in part to growing support for state-owned enterprises.

At the same time, global fears over trade wars between the United States and China have begun to hurt emerging markets. The Institute of International Finance reported that, amid escalating trade tensions this week, emerging markets had seen nearly $3-billion in outflows from stocks and bonds.