- Portfolio flows into and out of SA bonds are an influential driver of the ZAR’s direction. The stronger the level of attraction and the greater the degree of foreign interest, the higher the probability that the ZAR will appreciate. It is, therefore, important to understand what dynamics influence the level of SA’s bond market attractiveness.
- In recent years, SA has done a poor job of managing its fiscal resources. It has slid down the credit rating ladder, and rising debt levels have rendered SA bonds much more sensitive to bad news. There are some early signs that this could be changing through the newly installed coalition government as investors have unwound some of the risk elements priced into SA bonds. That has helped offset some of the impact of the carry trade-related volatility seen early in August.
- Whether this will be sufficient to keep the ZAR underpinned will depend in part on whether the government is successful in implementing hard-hitting reforms that help bond yields decline and trigger a virtuous cycle.
BASELINE VIEW:
The bond market offers a good barometer for the degree of risk a country faces. The higher the bond yields trade relative to its trading partners, the greater the perceived risk of that country. However, higher bond yields may prove attractive should the government start to implement constructive reforms. The virtuous cycle that would follow, would help drive ZAR appreciation, and investors may be witnessing the first signs of that at the moment.
Read article