South Africa’s bond market is losing its low-risk appeal and according to reports there could be even further losses.
JP du Plessis, fixed income portfolio manager at Prescient Investment Management, told the Argus that bonds have been regarded as a safe-haven investment but investors may soon have to consider other alternatives.
In May this year, Reuters stated that data from the Johannesburg Stock Exchange showed that foreigners sold almost five billion rand (more than $500 million) worth of bonds during in one session alone.
Why are bonds losing their appeal?
Rob Spanjaard, director at REZCO Asset Management, said that bonds usually behave inversely to the interest rate. Now that interest rates are going up globally, it has forced the value of bonds to go down.
Absa’s first quarter asset management investment report backed this up stating that with low cash yields, bonds offer higher returns than cash but risk remains from rising inflation.
“Bonds will always be less volatile than shares but international investors have bought bonds in South Africa because they could get it at a good interest rate. Now that the United States interest rates have gone up, it impacted emerging economies like South Africa, Mexico and Brazil,” said Spanjaard.
No longer a good foreign investment
According to reports the US 10-year bonds are 2.5% while the SA 10-year yields are 7.65%. This has attracted foreign investors to our local bonds.
But with interest rates going up in the US, Du Plessis said foreigners could sell off their holdings of SA bonds, resulting in a loss of bond portfolios.
What are the other low-risk options?
Spanjaard said there are many low-risk unit trusts which investors could look into as an alternative investment.
For a low risk investment you can select a unit trust that invests in money market (or cash) instruments.
Spanjaard said when it comes to unit trusts it is best to have a good mixture in your portfolio and speak to your financial advisor about which ones will best suit you.
“For now, bonds are not a good investment because their value could depreciate more. At this point it would rather be better just putting your money in the bank,” said Spanjaard.