South Africa’s local-currency bonds have outperformed global peers, returning 9.3% in dollar terms this year. The success is driven by political stability post-election, improved fiscal outlook, and a halt in power cuts. Investors are optimistic, with yields expected to fall further. High interest rates and positive inflation trends bolster the appeal, drawing significant foreign investment. Local demand remains strong, signalling continued bullishness for South African bonds.
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By Colleen Goko
The outlook for emerging-market local-currency bonds is less than rosy — except in South Africa, which has delivered world-beating returns this year and is seen extending that run.
Developing-nation local debt has struggled amid pressures from higher-for-longer US interest rates and geopolitical risks. Strategists at Goldman Sachs Group Inc. said they’re “leaning defensive” on the asset class due to the volatility the US election may bring.
But in South Africa, investors are leaning in. The bonds have already returned 9.3% in dollar terms this year, more than any other local-currency sovereign debt. The average return for emerging markets was just 0.1%.
South Africa’s general election was the catalyst. Even before the May 29 vote, investors began loading up on the bonds anticipating that a market-friendly government would emerge — and it did.
The yield on benchmark 2035 rand securities has dropped about 140 basis points since the poll to around 11%. It’s set to fall to 10.88% by year-end, and 10.49% by the end of 2025, according to the median forecast in a Bloomberg survey.
“Post the elections there is a lower risk premium paired with an improving fiscal story, albeit slowly,” said Thierry Larose, a Zurich-based portfolio manager at Vontobel Asset Management.
It’s not only the brightening political situation that’s driving bond gains.
South Africa has gone more than 100 days without power cuts after record blackouts last year that crippled the economy. A plan to use gold and foreign exchange reserves to cut the budget deficit has lowered the government’s debt-service costs and improved the fiscal outlook.
With local asset managers mostly at or close to prudential limits on investing offshore, there is potential for capital to flow back onshore as the fundamentals improve, according to Larose. South Africa’s yields remain among the highest in emerging markets, offering juicy returns for investors anticipating lower developed-nation rates in the months ahead.
“Rates are relatively high by global EM standards, and the curve is quite steep,” he said. “Of course, this is due to the deterioration in the credit and risk premia built into the curve, but everything has a price, and the carry and rolldown are still attractive despite the post-election rally.”
Inflation and monetary policy are also moving in the right direction. A measure of South African inflation expectations has dropped to the central bank’s target point of 4.5%, reinforcing bets for a policy easing cycle to begin in September. Forward-rate agreements that capture the September meeting show that traders are fully pricing in a quarter-point cut.
Foreign investors have been net buyers of the nation’s debt to the tune of 23.4 billion rand ($1.3 billion) this year — on track for the largest annual inflow since 2019, based on data reported by exchange operator JSE Ltd.
Demand at South Africa’s government bond auctions has remained strong. The weekly sale on Tuesday drew 18.5 billion rand of orders, nearly five times the 3.75 billion rand of securities on offer, according to data published by the central bank.
“I am bullish on South African local-currency debt for the rest of the year,” said Eimear Daly, an emerging-market macro strategist at NatWest Markets. “Clarity over the domestic political situation has provided the needed trigger for investors to re-engage.”
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