Bonds weaker ahead of Gordhan’s budget address
The South African bond market was weaker in late afternoon trade on Tuesday, the last full trading day before the budget on Wednesday.
Finance Minister Pravin Gordhan must deal with a ballooning budget deficit to balance the books in a low-growth environment. In the medium-term budget policy statement last year, he set out targets of R20bn for spending cuts and R28bn for tax increases to achieve the R48bn contraction target needed for the budget.
Bonds have been on edge amid scepticism over whether Gordhan has enough room to address the shortfall and whether political pressure will force him to backtrack on further fiscal consolidation.
Rating agencies will be checking the budget closely for any signs of fiscal slippage.
At 3.36pm, the R186 was bid at 8.82% from 8,76% and the R207 was bid at 7.90% from 7.865%.
Old Mutual Multi-Managers chief investment strategist Dave Mohr said a "good" budget was necessary, but was not of itself sufficient for securing SA’s investment grade rating. "Political stability and faster economic growth will also be required," he said.
Mohr said commitment to fiscal discipline was positive for bonds. "Fiscal consolidation tends to put downward pressure on inflation, making it more likely that the Reserve Bank will consider cutting interest rates, a further positive for domestic bonds," Mohr said.
The US 10-year treasury bond was bid at 2.4523% from Monday’s 2.4173%.