SA bonds had their best day since the height of Ramaphoria on Monday, and the rand had its biggest rally in two months as investors breathed a sigh of relief after SA escaped a ratings downgrade from Moody’s Investors Service that could have seen billions of dollars flee the country.
The yield on the R186 bond due in 2026, which moves inversely to the price, dropped the most since February 2018, when Cyril Ramaphosa’s elevation to the presidency sparked a wave of confidence for an economic revival.
Monday’s market recovery indicates that traders sold bonds last week in anticipation of a downgrade from Moody’s, the only major ratings agency with an investment-grade rating on SA.
The change in the ratings outlook to negative from stable was widely seen as the best-case scenario, so there was some relief that the outcome was not even worse.
Whether the rally seen in the wake of Moody’s decision to keep the country at Baa3, one rung above junk status, will last remains to be seen, said analysts, who expect the rand’s near-term performance to be at the mercy of global risk factors, such as the US-China trade talks, while locally they wait for signs that the government will follow up with the reforms needed to boost the economy and stabilise its finances.
The risk for SA was that a downgrade would have led to bond traders deserting the country as it fell out of major indices, pushing the rand weaker and increasing the risk of the SA Reserve Bank having to raise interest rates to preserve the yield advantage of local assets and stop a spike
in inflation.
"Some market participants were probably pricing in an
outright downgrade from Moody’s following the worse-than-expected medium-term budget policy statement" last week, said Rand Merchant Bank (RMB) fixed-income and currency strategist Varushka Singh.
"Therefore that negative outlook is not as bad of an outcome for those who were expecting worse, but the devil is in the detail and the probability of a downgrade in March is yet to be priced in."
The rand had gained 1.9% to 14.7442/$ at 7.54pm on Monday, the biggest gain since September 4, according to Bloomberg data. That left it 2.79% stronger than its Friday low of R15.1681.
The yield on the 2026 bond was down 15.2 basis points
at 8.4%, the biggest drop since February 15 2008, when Ramaphosa was sworn in as president.
Singh said the RMB forecast was for the rand to end 2019
at R15.30/$.
Treasury partner at Peregrine Treasury Solutions Paul Muller said a "lack of urgency" on the government’s part could see Moody’s not being as tolerant after February’s budget.
Analysts say the rand could continue to strengthen if global risk factors ease and major central banks keep cutting interest rates, improving the attraction of holding emerging-market assets.
Futuregrowth quantitative analyst Yunus January said "there could be a cap" on the rand weakening further.
"Ultimately, a big chunk of capital is looking to be put somewhere in order to earn yield and because of that, demand for emerging-market and SA bonds could potentially put a cap on the rand weakening further," January said. With Lynley Donnelly
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