The government of national unity (GNU), now a year old, has generally been a boon for the financial markets, with government’s borrowing costs decreasing as bond yields fell over the period, according to market data.
Still, Victor Mphaphuli, head of fixed income at asset manager Stanlib, said the GNU has been a positive and negative for the bond market, saying its instability is hurting the financial markets.
“When the GNU is not stable and with all the challenges — as we saw with the budget — the yield curve steepened. This is a sign of discomfort as the market loses confidence,” he said.
“The GNU was welcomed by the market as we saw positive sentiment return and the political risk premium unwind. We saw yields on an uninterrupted decline from 12.49% to just under 10%. This reversed as the GNU was threatened, so it is clear that in terms of the budget and the country’s overall finances, it is a better outcome if we get a strong GNU than one that derives from a flimsy majority.”
The data shows that before the formation of the GNU, the yield on the 10-year government bond was as high as levels reached during Covid-19 outbreak as markets discounted the possibility of a hung election outcome.
Yields then declined with the formation of the GNU. When yields decline — the amount of interest to be paid on bonds falls — governments are generally able to borrow at lower interest rates, reducing the cost of issuing new debt.
Over time, that contributes to a lower average cost of borrowing, especially as older, higher-yielding bonds mature and are refinanced at the lower rates. The effect is not immediate though. Government debt portfolios typically include bonds of various maturities, so the average borrowing cost reflects a blend of historical and current borrowing conditions.
Yunus January, portfolio manager and interest rates analyst at bond investor Futuregrowth Asset Management, said that despite some easing in yields between the budgets of 2024 and 2025, the cost of borrowing is expected to rise.
“According to the National Treasury’s 2025 budget (March), government debt-servicing costs are projected to grow by 9.1% over the 2024/25 and 2025/26 fiscal years from R389.8bn to R425.2bn,” January said.
“That said, compared to previous fiscal years, the debt servicing cost growth has declined significantly and is set to decline further in the forecasted outer fiscal years.”
Ané Craig, head of fixed income at PSG Asset Management, said yields on the benchmark R2030 government bond climbed as high as 10.8% ahead of SA’s national elections in May 2024, reflecting investor nervousness.
“However, the establishment of a GNU was welcomed by bond investors, boosting bond prices and driving yields lower. While the GNU contributed to improved sentiment, it’s difficult to isolate its exact effect as global conditions were also turning more favourable between June and September 2024.
“In particular, the outlook for global inflation improved, prompting markets to anticipate substantial interest rate cuts by major central banks. At one point, up to eight 25-basis-point cuts were expected from the US Federal Reserve in the first half of 2024.”
Domestically, the delayed release of the February national budget had little impact on bonds. However, political disagreements in the GNU — especially over VAT policy — did weigh on markets.
That coincided with broader global volatility, triggered by President Donald Trump’s “Liberation Day” tariff announcements, leading to a widespread sell-off across international markets, including SA bonds.
“Two conclusions are clear. First, any breakdown of the GNU would likely undermine investor confidence, negatively affecting both bonds and equities,” Craig said.
“Second, SA bonds are particularly vulnerable when domestic political or fiscal issues arise during periods of global market stress. Conversely, when local reforms coincide with a supportive global environment, bond yields fall, reducing the government’s cost of borrowing.”
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