Temporary spike in yields after potential WGBI exclusion

Temporary spike in yields after potential WGBI exclusion

• Given the possibility that SA could fall out of the World Government Bond Index (WGBI) should Moody's downgrade its sovereign credit rating to sub-investment grade when it resolves the current credit rating review in Q1:18, we look at the available international precedents to assess the typical market response to such an event.
• There are very few examples of countries falling out of the WGBI, partly by design (given that the requirement to enter is an A (or equivalent) rating, and it requires a sub-investment grade rating to be expelled).
• Portugal fell out of the WGBI at the beginning of February 2012. This was the trough in its credit ratings, and its economic growth and fiscal trajectories (bar a temporary deterioration in 2014) generally improved thereafter. When Portugal was excluded from the WGBI, it marked the peak in its bond yields. There was a marked change in its bond yield around the event itself, but this was temporary.

By: Elna Moolman

For chart of the day, please see PDF.

Daily commentary

Rand view: Following fake news reports that President Zuma was stepping down as the country’s president, ZAR traders were hopeful that the start of the NEC meeting would provide clarity around President Zuma’s remaining term in office. However, the ANC’s new Secretary General, Ace Magashule, has said that this was not the case and that it was not on the agenda of the meeting. The rand started correcting the gains made around the rumours. We still believe that the rand will remain sensitive to news out of key political events this week.

• The expected NEC policy document for clues on how SA will try achieve sustainable growth, fiscal consolidation and radical economic transformation.
• The ANC’s “January 8 Statement” due for delivery on Saturday, for guidance on radical economic transformation and the free tertiary proposal in particular.

UST yields: Yesterday, there were media reports stating that China was considering reducing their holdings of USTs. China is the biggest holder of USTs. This caused the dollar to weaken and Wall Street stocks took a knock on the news. However, the reports were fake, and assets and the DXY have been repairing losses.

SA yesterday: SACCI business confidence index (BCI) for December increased to 96.4 pts from 95.1 pts in November.

SA today: Manufacturing production for November: Recall that October manufacturing production growth rebounded to 2.2% y/y, after contracting 1.7% y/y in September. The rebound in manufacturing production was despite the SA manufacturing PMIs being in contraction for half the year. We note that base effects are generally not favourable in November, and December is generally a low production month due to the festive season.

Fed speech: St. Louis Fed President James Bullard said that the Fed’s inability to get inflation to its target has caused a gap in the economy to emerge between the actual and desired price level. To compensate for this, the Fed would have to allow for a higher inflation band. Bullard has joined in on other Fed policymakers’ commentary questioning the Fed’s inflation-targeting policy.

On our radar

• Fed speech: Market looking for clues on the number of interest rate hikes.
• ANC policy document and conclusion of NEC meeting.
• China’s trade data on Thursday:  We monitor China’s trade for clues to any signs of a slowdown in China.
• US inflation for December on Friday: Rising inflation would be a catalyst for further rate hikes this year.

By: Zaakirah Ismail

Latest research publications:

SA Macroeconomics: Rand outlook by Elna Moolman (10 January 2018)

Credit Special Report: Eskom update by Steffen Kriel (10 January 2018)

SA Macroeconomics: Economic Insight by Elna Moolman (9 January 2018)

SA Economics: Dec vehicle sales -2.4% y/y by Thanda Sithole (9 January 2018)

African Sovereign Eurobond Weekly: African Eurobonds: Early gains in the New Year by Dmitry Shishkin (8 January 2018)

African Local Markets Monthly: Not many worries about FX by Phumelele Mbiyo (19 December 2017)

SA Macroeconomics: ANC National Conference by Elna Moolman (18 December 2017)

SA Macroeconomics: Macro Weekly by Elna Moolman and Thanda Sithole (15 December 2017)

Credit Weekly: Nersa publishes tariff decision by Robyn MacLennan, Steffen Kriel and Varushka Singh (15 December 2017)

SA Macroeconomics: 3Q17 CAD only 2.3% of GDP by Elna Moolman and Thanda Sithole (14 December 2017)

SA Macroeconomics: CPI for November 2017 by Elna Moolman (13 December 2017)

SA Macroeconomics: Economic Insight: Fiscal options: Can a wealth tax help? by Elna Moolman (11 December 2017)

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