The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

The government can now borrow in the domestic market at the lowest cost in more than five years to fund its yawning budget deficit, thanks in part to the country’s central bank.

The SA Reserve Bank has slashed its policy rate to a record low — and traders are betting on more easing to come — while buying bonds in the secondary market since March, among measures to bolster liquidity and counter the effect of the coronavirus on an economy that was already struggling to avoid a recession before the pandemic struck.

That’s driven the yield on benchmark 2026 securities to the lowest since March 2015, according to data compiled by Bloomberg — even as foreign investors sold off a net R67bn ($3.6bn) of the debt this year.

Moody’s Investors Service downgraded the credit to junk in March, triggering the country’s exclusion from the FTSE World Government Bond Index, tracked by more than $3-trillion of funds.

“The bank has given the market a sense of calm,” said Michelle Wohlberg, a Johannesburg-based trader at FirstRand Bank.  “Investors know that there will always be a buyer of last resort. The front end of the curve has tracked lower on the back of further rate cuts being priced in.”

While foreign investors have been shunning the bonds, the lower policy rate and slowing inflation have made them attractive to local investors, especially banks flush with cash due to the central bank’s liquidity-boosting interventions.

Non-residents’ share of local debt dropped to 32.6% at the end of April, from 37.3% in January, according to National Treasury data. Among the most voracious buyers in that period have been SA lenders, who increased their holdings to 20.1%, the most on record, from 16.7% in December. Yields on the 2026 securities fell 43 basis points by 5.47pm in Johannesburg to 7.35%%. Those on the country’s 10-year notes, which peaked at 12.38% in March, have dropped to pre-Covid-19 levels, falling 49 basis points on Monday to 9.10%.

Forward-rate agreements are pricing in a reduction of 60 basis points in the benchmark lending rate when the central bank’s monetary policy committee meets on Thursday. The median forecast of economists in a Bloomberg survey is for a 50-point cut to 3.75%.

Reserve Bank governor Lesetja Kganyago said earlier in May that policymakers have room to give the economy more support, after they slashed the repo rate by 200 basis points since March.

The five-year break-even rate, a measure of investor expectations for inflation, fell to a record low of 2.45% on Monday, underscoring market optimism that more policy easing is in store.

One warning note, however, is the steepening yield curve with long-end yields falling at a slower rate because of lingering concern over rising government debt levels and the widening budget deficit. That makes borrowing in at longer maturities more expensive.

“Given our negative views on the fiscal metrics, the curve should be steep in the long term,” Guillaume Tresca, a senior emerging-market strategist at Credit Agricole in Paris, said in a client note.