R186 Long Bond

12 May 2020 By PDSNET

Sometimes things happen in the markets which cause you to ask the question,

"What can they see that I can't see?"

The progress of the yield on South Africa's long bonds is like that.

South Africa has just been downgraded by both Moodys and Standard & Poors. We are officially at junk status - so you would think that our government debt instruments would be out of favour among international investors. Here in South Africa everything seems so bad. There is hardly any good news and investors are almost universally negative.

And yet the yield on our long bonds continues to fall.

The yield on a bond moves inversely to the price of the bond. Bonds have a fixed "coupon" on interest rate - so when the price of the bond goes up the effective yield on it falls. Our long bonds are sought after by international investors because they offer a real return - in other words, the yield is higher than our domestic inflation rate. In South Africa the yield on our bonds was as much as 13% at the height of the COVID19 panic and our inflation rate was around 4% giving investors a real return of as much as 9%.

So when overseas investors like what we are doing they buy our bonds and push the effective yield down. Their perceptions are impacted by how they see our political leadership and management.

And overseas investors have been piling in - pushing the effective yield on the R186 bond down to as little as 7,65% - amazingly, that is lower than it was before the start of COVID19 - consider the chart:

R186 RSA 10.5% Bond November 2018 to May 20202 - Chart by ShareFriend Pro

You can see here that prior to COVID19, the effective yield on the R186 had been falling gradually and steadily as overseas investors gained confidence in what President Ramaphosa was doing on many fronts. Then the yield spiked up as "risk-off" sentiment caused investors to flee into safe haven investments like gold and US Treasury bills. Then, as many countries began to relax their lockdowns, the mood changed and the hunt was on for real return. The yield fell heavily as investors gained confidence in Ramaphosa and saw how effectively South Africa was handling the pandemic.

Sometimes it is difficult for South Africans to see anything except "doom and gloom" - but clearly overseas investors see our situation quite differently. They are obviously really beginning to appreciate the strong leadership displayed by Ramaphosa over the crisis - something which has been notably absent from other first world countries, especially America.

So, here is a glimmer of hope amid all the negativity.  


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

Bitcoin versus Gold

Cryptocurrencies cannot really be considered an investment because they have no fundamentals. Their value is derived exclusively from the belief of the people who invest in them. When belief in Bitcoin is strong the price rises and when it is weak, the price falls.

Bitcoin cannot be regarded as a “safe haven” asset

Uncertainty

Most investors would probably agree that there is a considerable amount of uncertainty in equity markets at the moment. From a fundamental perspective, that uncertainty has come about because of:

  1. The force with which the central banks of the world (especially the US Fed) will “stamp on the brakes” to reduce

Powells Punch

In November last year we wrote the following about the U.S. economy in the Confidential Report:

…what if the Fed is wrong about inflation and it persists at the current high levels or even increases? September was the 5th month where inflation was above 5%. If they are wrong, then they will need to raise interest

Lewis

Nineteen months ago on 2nd of September 2020 in the Confidential Report, we recommended buying Lewis shares when they were trading for just 1668c. The share has now moved up to 4670c – a gain of 180%. Amazingly, it remains excellent value today despite this substantial rise in its price.

The company has 817 stores with 84%

Linear vs Semi Log

Most charts of share prices or indexes that you will come across are linear. The date is measured on X-Axis (horizontal) and the price or index level is measured on the Y-Axis (vertical). For short term charts linear scales are fine, but the longer your chart, the more misleading a linear chart becomes, especially for data streams which generally increase over

Remgro

In recent times there has been a trend for investment holding companies to unbundle their assets into the hands of shareholders, thus releasing substantial value. The shares of investment holding companies traditionally trade at a significant discount to the market value of the assets which they hold, and this provides them with an opportunity to

Gold

Throughout history, in times of war or major crisis, investors have always sought a safe haven for their wealth. And that safe haven has inevitably been gold. The various assets available for investment can be arranged in order from the highest return and most risky to the lowest return and least risky. On that scale, gold is on the one extreme –

Buying Opportunity

Investors don’t like uncertainty, but investment is about predicting the future and, of course, that is all about assessing the impact of an array of uncertainties. As an investor you have to use your analysis, experience and understanding to reduce the level of uncertainty to an acceptable place.

Uncertainty is reflected in volatility.

Inflation

There can be little doubt now that inflation world-wide is gaining momentum. America recorded 7,5% in January 2022 and Europe had inflation of 5,1% in January 2022 which is expected to rise to 5,8% in February. If that happens it will the first time for many decades that I can recall inflation being higher in both Europe and America than it is here in South Africa.

Ukraine

When you buy shares, you are immediately in the business of forecasting the future. You believe that the shares you have bought will go up. If you thought that they were going down, you wouldn’t have bought them. Your prediction that the share will go up can be divided into two primary areas – the prediction that the share market as a whole will rise (systematic)