Bronwyn Nortje:

THE closing line of the Treasury press statement released yesterday announcing the issue of a $2bn 12-year global bond suggests we should view the auction as a relative success.

However, closer examination suggests that global investor sentiment towards SA remains somewhat wobbly.

In terms of the technical stuff, the bond was priced at a coupon rate of 5.875%, 315 basis points above the 10-year US Treasury’s benchmark bond. According to the press release, the demand was mainly from investors in Europe and the US, and the deal was “printed against a difficult global backdrop characterised by rising yields and widening spreads”.

Whether or not the final line of the statement was meant as some sort of a caveat, the Treasury is of course absolutely right. Global conditions — especially for emerging markets — remain tough, and the end of quantitative easing in the US also means an end to artificially low bond yields.

The trouble is, we are exactly the type of market that remains significantly at risk against this difficult global backdrop of rising yields and widening spreads.

So while we may have managed a $2bn bond sale, the outlook remains uncertain.

Although the auction was fairly well subscribed by standard measures — more than 3.5 times — the subscription rate was nothing like earlier in the year, when South African sovereign bonds were 10- 13 times oversubscribed.

To be fair, owing to the significant inflows we saw earlier this year and in the latter part of last year, there was bound to be some correction in emerging market bonds, as seen when the US Federal Reserve first hinted, in mid-May, at bringing its expansive bond-buying programme to an end. Since then, yields on the 10-year US Treasury benchmark bond have been creeping up, from about 1.6% to just under 3% now.

Vivienne Taberer, a portfolio manager at Investec Asset Management, says the correction over the past several months means yields that looked expensive earlier in the year are much closer to fair value now.

Sadly, the relatively good auction result is more likely related to a change in macro conditions than anything specific to SA. According to the head of strategic research for global markets at Nedbank Capital, Mohammed Nalla, the decision to place the bond now was ideal, even somewhat opportunistic. Over the past week or so, there has been a definite shift in risk appetite towards emerging markets, which is only fair considering the hammering they have taken in the few weeks preceding.

According to those in the know, the price was much tighter than the 330 basis points above the risk-free 10-year US Treasury benchmark bond that was expected, and hence cheap relative to existing issues. Consequently, the issue brought some reshuffling in the secondary market, suggesting the Treasury might have left a little bit too much on the table for investors. Given the extent of the outstanding external capital requirements, this may have been necessary to ensure goodwill in future auctions. In that respect, only time will tell.

So while there is no question that the successful float of this bond has taken some pressure off the government’s funding requirements for the rest of the year, it certainly doesn’t mean we are out of the woods yet.

For starters, there are still valid concerns about the extent of the current account deficit. The Reserve Bank’s bulletin for the second quarter, released yesterday, showed that the deficit on the current account widened more than expected‚ to 6.5% of gross domestic product (GDP) from a deficit of 5.8% of GDP in the first quarter. While this may not have been too surprising given a sizeable increase in imports‚ and some deterioration in net dividend outflows, it was still wider than expected.

We know only too well that a current account deficit of more than 5% of GDP makes a currency particularly vulnerable to capital flight, and the worse than expected figures are likely to have a negative effect on the rand. If not immediately, they will affect the pace of a sudden sell-off when it happens.

Secondly, the spread on South African credit default swaps (CDSes) widened in recent months in comparison to our peers.

CDSes are a useful indicator of the underlying risk of the currency and economy. To put it simply, the higher the price of a CDS, the more likely the market thinks the bond is to default. What this tells us is that on a relative basis South African sovereign debt is still less favourable than that of other emerging market economies.

Twitter: @bronwynnortje