Bond auction underwhelms

 

 

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.

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.

Related stories

Former state security minister Bongo back in court

Bongo and his co-accused will appear in the Nelspruit magistrate’s court in Mpumalanga over charges of fraud, corruption and theft

Gas: South Africa’s next ‘battleground’

As government pushes for a huge increase in electricity generation from gas, serious questions are being raised about the logic behind the move

Khaya Sithole: What’s the state’s role in business?

State participation is valid when the market can’t deliver what’s needed, such as roads and rail networks and telecommunications. But banks and airlines are private enterprise concerns

Covid-19 puts Eskom’s integrated resource plan at risk

The economic effects of the pandemic could hamper the government’s initiative to procure new generation capacity

Renewables will light up the darkness

More than 11 800MW of new electricity capacity from independent power producers will come online in 2022, giving Eskom space to do more maintenance on its unreliable infrastructure

Cape quakes no concern for Koeberg

Last week’s tremor has anti-nuclear campaigners questioning the safety of Koeberg, although the nuclear facility said the plant is designed to sustain a magnitude-seven earthquake
Advertising

Subscribers only

Toxic power struggle hits public works

With infighting and allegations of corruption and poor planning, the department’s top management looks like a scene from ‘Survivor’

Free State branches gun for Ace

Parts of the provincial ANC will target their former premier, Magashule, and the Free State PEC in a rolling mass action campaign

More top stories

Malawi court judges win global prize

Members of the small African country’s judiciary took a stand for democracy to international approval

Durban city manager says NPA erred in his bail conditions

The corruption-fraught metro is coming to grips with having a municipal manager who is on bail for graft, yet has returned to work

Why anti-corruption campaigns are bad for democracy

Such campaigns can draw attention to the widespread presence of the very behaviour they are trying to stamp out — and subconsciously encourage people to view it as appropriate

Tax, wage bill, debt, pandemic: Mboweni’s tightrope budget policy statement

The finance minister has to close the jaws of the hippo and he’s likely to do this by tightening the country’s belt, again.
Advertising

press releases

Loading latest Press Releases…

The best local and international journalism

handpicked and in your inbox every weekday