South Africa’s weakest bond auction this year puts the government’s plans to lower the cost of debt at risk.
The weakest demand since December 1 has raised fears that the Treasury may struggle to finance its budget deficit in a macroeconomic environment of rising global yields and significant exits from the domestic bond market.
As the debt issuance exceeds the target for this fiscal year, the government has decided to keep sales amounts at current levels, reducing only the additional amount that investors can buy through a non-competitive auction, further curbing sales. demand.
Tuesday’s data added to concerns from traders that the South African economy had contracted the most in a century in 2020, as restrictions to curb the spread of the coronavirus pandemic ravaged production and disrupted trade.
“When the National Treasury decided to reduce the no-comp option but to maintain bond issuance until the end of the year, the market saw this as negative news,” said Michelle Wohlberg, Johannesburg-based fixed income analyst at Rand. Investment bank.
“We saw how it went in today’s auction with the lowest bid / cover ratios we’ve seen this year.”
Primary traders who buy bonds directly from the government placed orders for 11.5 billion rand ($ 749 million) in securities at Tuesday’s auction, 1.7 times the 6.6 billion rand put up for sale .
The sale took place against a backdrop of liquidation of foreign investors, with a 10th consecutive day of net sales on Monday, bringing the bond market outflows since the start of the year to $ 2.4 billion.
“Although we have seen local real money accounts buying bonds in weakness, it has not been to the same extent as overseas sales,” Wohlberg said.
Yields on rand-denominated bonds increased following the sale of the debt. Those on notes maturing in 2040 were the least requested at the auction and climbed on a sixth day by three basis points to 11.24%. This is the highest since November.
The Reserve Bank of South Africa has tempered its debt buyback program, which means there is now less protection for the country’s yields. Data released on Friday showed the bank’s holdings of government securities fell for the first time in a year, suggesting it has been less active in the secondary market.