Buy Today, Go Away for December South African Bond Gains

By Robert Brand  

Photographer: Nadine Hutton/Bloomberg

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Buy now, sell in January is Standard Bank Group Ltd.’s advice for investors in South African bonds.
The nation’s rand securities have a third month of gains in store in December as bondholders reinvest 15 billion rand ($1.4 billion) of coupon payments, while the end of weekly Treasury auctions on Dec. 17 reduces the supply of new debt, according to Africa’s biggest bank by assets. The bonds have rallied since September amid investor inflation expectations that have fallen to the lowest level in two years.
With oil prices plunging into a bear market this year, consumer-price growth in South Africa has stayed within the central bank’s target band for two months, giving policy makers scope to forgo raising rates. The resulting bond rally risks fizzling in the New Year as traders position
themselves for Federal Reserve tightening and the rand declines, according to Asher Lipson, head of fixed-income strategy at Standard Bank.
“We’re recommending a tactical long position from slightly higher levels into year-end, reducing in January,” Lipson said by e-mail yesterday. “Going into 2015, bonds will take direction from the winner between the expected lower inflation levels and likely weaker rand and U.S. Treasuries.”
South African local-currency bonds returned 8.7 percent in dollar terms over the past two months, the most after Turkish debt among 52 emerging markets tracked by Bloomberg. The difference in yield between five-year fixed-rate bonds and inflation-linked securities, a measure of investor inflation expectations, tumbled 77 basis points in the period to the least since November 2012.

Support Economy

Yields on rand bonds due December 2026 dropped seven basis points to 7.61 percent by 1 p.m. in Johannesburg, the lowest closing level in 18 months. The rand weakened 0.4 percent to 11.0158 per dollar.
The price of Brent crude, the most-used oil in South Africa, has fallen more than a third since June. Policy makers forecast consumer price growth will average 5.3 percent next year, down from a previous estimate of 5.7 percent. That gives them room to support an economy estimated to grow 1.4 percent this year, the slowest pace since the 2009 recession.
The central bank increased the key lending rate by 75 basis points in two steps this year to 5.75 percent, with the last a 25 basis point increment in July. Forward-rate agreements, used to speculate on borrowing costs, are pricing in 19 basis points of rate increases by mid-year, down from 72 basis points at the beginning of October.

‘Normalize Rates’

“I don’t think there is massive pressure to normalize rates locally, so the impetus will come from the global rate environment,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg. “Investors may start positioning a few months before” an expected Fed rate increase next year, driving yields higher, he said.
The U.S. Fed Funds Target Rate is set to double to 0.5 percent by the end of the second quarter, and rise to 1 percent by the end of 2015, according to median estimates in surveys of analysts by Bloomberg. South African 10-year yields may rise in tandem, climbing 61 basis points to 8.3 percent by the end of the second quarter and ending the year at 8.4 percent, surveys by Bloomberg of analysts show.
“It’s hard to be negative about bonds, given the growth and inflation situation,” Jean-Pierre du Plessis, an investment strategist at Prescient Investment Management,which oversees the equivalent of about $5.5 billion , said by phone from Cape Town yesterday. “But the correlation between our yields and U.S. Treasuries is quite high. There is concern about the direction of U.S. yields.”