National Treasury announced this afternoon a reduction in the size of the weekly nominal and ILB auctions. The quantum of SAGBs issued at the Tuesday auction will be reduced by R1.8bn from R6.6bn to R5.8bn; and the ILBs by R0.8bn from R2.0bn to R1.2bn. A reduction was expected following the February Budget Review that announced a decline in gross bond issuance from R518bn to R380bn. The total reduction of R2.6bn is better than my forecast of R2.0bn. The mix of funding will be diversified to include a rand Sukuk bond and an FRN.

Today’s nominal SAGB bond auction was poorly supported notwithstanding all SAGBs on auction in the belly of the curve i.e. R2030s, R213’s, and R2032’s. The bid-to-cover ratios were 1.66 times and the bonds were issued between 10.5bps and 16bps above market rates.

The high level of uncertainty relating to the direction of US Treasury yields and financial conditions and possibly recent developments in Turkey following the firing of the third central bank governor – which is creating uncertainty about the monetary policy framework and caused a selloff in the TRY and a widening in CDS spreads – are impacting global capital flows to EM. Additionally, asset allocation decisions in South Africa (with an increase in equities) could be a contributory factor the demand/supply dynamics in the bond market. In 2020, balanced funds increased allocation to FIC due to a weak outlook for the equity market. The timing was important as this overlapped with non-residents stepping out of the SA bond market (and EM in view of the Covid) and Moody’s downgrade from IG to sub-IG.  

Steve also notes that liquidity is very poor. The SARB’s reaction function will be monitored. The SARB’s intervention in the bond market petered out in August 2020 after the bond market dysfunctioned during the global USD liquidity squeeze in March/April 2020.