Blackouts, political risks weaken demand for SA bonds

Foreign investors have been rapidly offloading South African bonds due to increasing political risks and power cuts, driving the market sentiment to new lows. The South African Reserve Bank and the IMF have reported a meager 0.1% growth rate for the economy, further adding to the bleak outlook. The intense selling pressure in the bond market comes just before the anticipated S&P ratings update, with South Africa's rating already below investment grade. Mandeesa Zavala, the head of asset allocation at Alex Forbes, shed light on the situation in a recent CNBC Africa interview. Zavala highlighted the challenging scenario faced by South Africa, both domestically and globally, leading to a negative sentiment regarding emerging market bonds. The local currency's weakening trend against the US dollar has also contributed to the overall downtrend. The high real yields offered by South African bonds, though attractive under normal circumstances, are being overshadowed by the escalating default spreads and the increased risk premium associated with investing in the country's bonds. Investors are wary of potential defaults and are showing reluctance to engage in a market perceived as high risk. The recent negative news surrounding South Africa's economic growth prospects and the looming threat of sanctions have only added to the apprehension. Government bond auctions have encountered mixed results, with shorter-dated paper being more favorably received compared to long-dated bonds. Corporates, on the other hand, are facing challenges due to issues like power cuts directly affecting their operations. While corporate yields may seem enticing, investors are gravitating towards government bonds for their relatively stronger yields and lower idiosyncratic risks. The cautious stance in the market is not only a local phenomenon but is also influenced by global uncertainties, prompting investors to prioritize safety over higher returns. The looming possibility of a negative report from S&P has further dampened market sentiment, leading to more selling pressure. The deteriorating situation, including the prospect of severe power cuts and grid blackouts, has fueled concerns among investors, prompting them to explore alternative asset classes with better returns and stability. Despite some positive developments from the Treasury, the overall outlook remains bleak, forcing investors to reassess their risk exposure and seek safer investment options such as global bonds. The bond market turmoil is a reflection of the broader economic challenges faced by South Africa, underscoring the need for comprehensive measures to restore confidence and stability in the financial markets.