Warning signs are emerging that South African bonds are vulnerable to a sell-off should bond market liquidity remain at its recent low levels.
Average monthly turnover for South African bonds slid 25 % in the first half to R452.8bn Rand, while Emerging Market currencies eperienced a high degree of volatility relative to hard currencies. This could indicate that traders are becoming skittish and therefore becoming more aware of the short term risks of holding exposure to Emerging Market currencies.
Falling liquidity obviously raises the risk that it will be more difficult to sell the bonds in the event of any deterioration in sentiment. Rising U.S. interest rates or a slowdown in China, South Africa’s biggest trading partner, could lead to investors coming out of their rather entrenched state of complacency. Emerging or Developing Market government debt dropped in recent weeks as sanctions were imposed on Russia for their involvement in the Ukraine crisis and also after Argentina missed a debt payment.
Also worrying is that fact that Rand denominated SA government bonds have been underperforming their Emerging Market peers this year and foreign investors were net sellers of our government debt for 10 straight days from the 21st to the July 31. This means that net purchases of our bonds by foreigners this year are down to R11.3bn Rand, compared with R26bn Rand in the comparable period last year.