Bond market faces uncertain future

Posted On Tuesday, 19 February 2002 03:01 Published by
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Analyst suggests state buy-back programme may be less aggressive than expected
Analyst suggests state buy-back programme may be less aggressive than expected

THE local bond market faces an uncertain future as government's debt buy-back continues.

Revenue overruns have put government in the position to repurchase its bonds before they mature.

While the issue of supply has driven yields consistently lower in the past year, the outlook for supply may not be as poor as some have feared. A bond analyst said this year's programme of government buy-backs might not be as aggressive as many have expected.

'The high values of debt that some in the market see as government buying back (bonds) are not on,' he said.

PLJ financial services economist Dawie Roodt said last week that the buy-backs could be as big as R30bn, but the analyst disagreed, saying that the R9bn that had been budgeted for buy-backs in the 2002-03 fiscal year may not even be met.

Rather than helping push yields under the key 10% level, the analyst believed that government's e buybacks had created bands in which bonds would trade.

These bands of between 10% and 12,5%, were far lower than the range of 13% to 15,5% that bonds traded in before government's favourable revenue position was revealed, and were capping yields because the market was underpinned by the shortage of debt.

'The relationship between bonds and the fiscus is tenuous, and only reveals itself over the long term,' the analyst said. Once the budget was out of the way, yields could again experience upward pressure as inflation threatened.

A trader said the market had been drifting ahead of the budget tomorrow as uncertainty rose on the direction bonds would take after the budget.

Sanlam investment management economist Jac Laubscher predicted a budget deficit of about R28bn or 2,6% of gross domestic product for the coming year, an amount which could be covered entirely by expected privatisation proceeds of R15bn and scheduled foreign borrowing of about R13bn. Laubscher said government would enter the 2002-03 financial year with about R20bn in cash, which might be used to buy back more bonds.

This would leave government in a position where there would be no need to issue any new domestic bonds. However, Laubscher pointed out, the state 'has responsibilities other than financing debt', such as ensuring that the continued development of the domestic capital market and providing benchmarks for the fledgling corporate bond market.

He said the banking sector required a supply of liquid assets, while institutional portfolios needed longer-term paper. There was also the issue of retirement funds, which still had to hold a specified minimum amount of their investments in bonds.

Laubscher proposed that government fulfilled its obligations by issuing a five-year bond to cater for the banking sector, and then use the proceeds to buy back a long bond such as the R157.

The analyst said government could not issue offshore debt, as the currency risk attached to the issuing of bonds overseas made it dangerous, and raising money domestically was still as much as 2% cheaper than abroad.

The national treasury is seen as continuing its buy-backs of homeland debt throughout the year, although there is some doubt as to how successful buy-backs can be, as the auction to buy back the illiquid R175 proved disappointing for the treasury.

Publisher: Business Day
Source: Business Day

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