SA’s blended 10-year bond yield fell to its lowest level since before the Covid-19 pandemic as finance minister Enoch Godongwana confirmed the country’s new 3% inflation target.
The news saw the rand firming to R17.04/$, its strongest intraday level since September 2024, while bond yields fell to as low as 8.68%, extending a steady drop over the past nine months, signalling billions in savings in borrowing costs for the fiscus.
The effect on existing debt would, however, be limited, said TreasuryONE currency strategist Wichard Cilliers, as lower bond yields could only be secured on new government paper, effectively reducing future debt-servicing costs.
The fall in yields coincides with a growing sense of optimism on SA’s economic and fiscal fundamentals, which, with a weaker dollar, has significantly buoyed the country’s standing among international investors.
The rand is on track for its first year of gains since 2019 and its best year since 2017, while the JSE has seen its biggest rally in nearly two decades, shrugging off police corruption scandals and geopolitical uncertainty.
Read: Treasury and Reserve Bank set new 3% inflation target
Interest rate cuts and the shift to a lower inflation target, a long-awaited move confirmed by finance minister Enoch Godongwana in his medium-term budget policy statement on Wednesday, have acted in concert to boost the appeal of SA bonds, with soaring precious metal prices adding further tailwinds.
“A bond investor’s biggest enemy is inflation,” said Old Mutual Wealth chief investment strategist Izak Odendaal. “So, if you promise that inflation over the next decade will be about 3%, that immediately makes SA bonds more attractive.
“That bonds have rallied so much in recent months suggests investors believe the Reserve Bank’s promise is credible,” he said.
The flock to local bonds aligns with a broader trend among emerging economies due to concerns over the health of the US economy and its fiscal stability, with most emerging markets enjoying currency rallies and lower bond yields this year.
In SA, however, the rally is also a story of fiscal consolidation, the stability of the coalition government and real progress on structural reform.
The private sector has welcomed a more stable electricity supply and green shoots in logistics, with business confidence in the first three quarters of this year significantly outpacing the same period last year, according to the SA Chamber of Commerce and Industry.
SA’s international reputation as a well-regulated financial and economic hub has been further buoyed by its departure from the greylist of the Financial Action Task Force (FATF) last month, fuelling hopes that the country may be due for a ratings upgrade.
Business Day reported earlier this month that Bank of America has pointed to a positive rating move, arguing that improving growth prospects and falling debt ratios could pave the way for a sovereign upgrade by S&P on Friday.
Should S&P raise the country’s status, other ratings agencies may follow suit, with Moody’s set to re-evaluate SA’s credit rating in early December.
“From the depths of despair in mid-2023, SA has been trending slowly in the right direction,” said Ninety One director Jeremy Gardiner. “Momentum looks set to continue, with a positive medium-term outlook for the next few years.
“The [Government of National Unity] is functioning, albeit imperfectly, and progress is being made. Visa backlogs have been cleared; Home Affairs is being digitised; Operation Vulindlela has essentially fixed electricity; and railways and ports have made significant progress,” he said.
Despite the potential gains, challenges persist, with stagnant growth and structural unemployment continuing to weigh heavily on the country’s outlook.
“The budget numbers are looking good despite weaker-than-expected economic growth, but the growth story may still hold back a ratings upgrade,” Odendaal said.
“I do think we’ll see ratings upgrades, but we may need to wait another six months or so. It’s a case of when and not if,” he said.
More on the medium-term budget:
SA’s 3% inflation target sets sights on price stability and investor confidence
Treasury and Reserve Bank set new 3% inflation target
MTBPS reallocates modest fiscal room — who gains and who loses
Treasury lowers growth forecast with eye on protectionism
Finance minister voices concern about health’s plan to scrap medical tax credits
MTBPS shows marginal fiscal gains while debt costs weigh on outlook
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