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The SA Daily 17 October 2018

Bonds still cheap amid risks

Shireen Darmalingam

  • The local yield curve steepened last week. We now see shorter-dated bond yields as more fairly priced than longer-dated bond yields (which remain undervalued). While we still expect the yield curve to flatten somewhat, the ongoing fiscal and credit risks will likely keep it steep. Here, we look to the Medium-Term Budget Policy Statement (MTBPS) next week.
  • We foresee a benign MTBPS – see our report Some slippage of 11 October, by Elna Moolman. We expect little revenue underperformance; underspending on existing budgets (likely to be usurped by wage bill overspending and/or presidential stimulus plan); the expenditure ceiling to remain intact; deficit-neutral funding for state-owned companies (but this is a risk); and, the debt trajectory to stabilise over the medium term. However, without a material growth acceleration, the medium-term risks could be significant both from higher funding costs and ambitious longer-term spending plans.
  • If the MTBPS is as benign as we expect, and if Moody’s preserves SA’s credit rating and the stable outlook this year, it should provide relief to the bond market. However, bonds may even then likely remain undervalued as many market participants argue that the Budget 2019 and the subsequent credit rating review would be the more critical risks (see Stalling of 15 October, by Elna Moolman).

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