South Africa’s rand extended gains and benchmark bonds recovered almost all their losses since the start of the coronavirus sell-off as investors looked past mounting domestic risks to focus on the prospect of further global stimulus and signs of progress in treating the disease.
S&P Global Ratings cut South Africa deeper into junk on Wednesday amid concern the Covid-19 pandemic will send the economy into a sharp downturn. Last month, the country lost its Moody’s Investors Service investment-grade credit rating, which will lead to rand bonds being excluded from the FTSE World Government Bond Index when it is reweighted at the end of trading Thursday. The gauge is tracked by around $3 trillion of funds.
Still, the rand advanced for a fifth straight day on Thursday, heading for its strongest level against the dollar in three weeks on a closing basis. The currency’s implied volatility fell to the lowest since the beginning of March, suggesting traders expect price swings to narrow in coming weeks, even with the risk of capital outflows.
“Quite odd, considering South Africa’s impending exit from the WGBI and S&P’s one-notch downgrade of the sovereign’s foreign-currency rating,” said Nema Ramkhelawan-Bhana, a Johannesburg-based analyst at FirstRand Bank Ltd. “A clear sign that global determinants are outweighing local risks.”
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Yields on the most-liquid 2026 government rand bond fell 25 basis points to 8.48%, the lowest since March 11, the day before heightened concerns about the spread of the virus sparked an exodus from emerging-market assets.
The ratings company downgraded the country’s long-term foreign-currency rating to BB-, three notches below investment-grade, from BB. South Africa’s cost of servicing public debt will climb to about 6.5% of gross domestic product by 2023, S&P said Wednesday. Yields on 10-year Eurobonds dropped 11 basis points to 7.04%. The spread has narrowed from as high as 781 in March.
The exit from the WGBI may trigger forced selling by funds that track investment-rated indexes, sparking outflows of a much as $10 billion, by some estimates. Still, some of that positioning may have happened already. Outflows from the country’s bond market this year are at 63 billion rand ($3.5 billion), according to JSE Ltd. data. Foreign investors were net sellers of 116 million rand of South African bonds on Wednesday.
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