Stock in trade: There has never been a 20-year period when equities did not go up or did not outperform bonds, says Nobel economics laureate Richard Thaler. Picture: ISTOCK
Stock in trade: There has never been a 20-year period when equities did not go up or did not outperform bonds, says Nobel economics laureate Richard Thaler. Picture: ISTOCK

South African government bonds were steady at levels last seen in July 2015 on Monday afternoon, with market focus on upcoming events this week, notably the tabling of the budget on Wednesday.

Wednesday’s budget will be closely watched amid expectations that the administration of acting President Cyril Ramaphosa will pursue a strict policy of fiscal consolidation.

SA’s growing budget deficit, taking place alongside wasteful expenditure and rent-seeking, is the primary reason two ratings agencies — S&P Global and Fitch — have downgraded SA’s credit rating to junk status. Moody’s alone has opted to keep SA’s credit rating above sub-investment grade.

If Moody’s downgrades SA, the country will fall off key global bond indices, something that would prompt automatic selling of local debt by institutional investors.

A sharp rand reaction should be expected directly after the budget speech, and again when Moody’s provides its response, presumably within a day or two after the event, Rand Merchant Bank currency strategist John Cairns said.

The best-case scenario for the rand was a 30c to 50c strengthening if the budget and Moody’s gave a clear sense that a downgrade had been averted, said Cairns.

At 3pm the R186 was bid at 8.09% from 8.11% and the R207 was at 6.745% from 6.74%.

The rand was at R11.6568 to the dollar from R11.5999.

The R186’s yield has improved 5.59% so far in 2018, as a trend toward fiscal consolidation is bond friendly.

The US 10-year treasury was last seen at 2.8786%. US and Chinese markets were closed on Monday, which was likely to subdue trading.

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