JOHANNESBURG- South African bonds rallied sharply on Tuesday after Citigroup said they were set to be included in its World Government Bond Index (WGBI), widening the investor base for South African debt and pulling in potentially billions of dollars of new money.
Yields on the benchmark 2026 issue fell 30 basis points – their biggest daily decline since November – to 8.13 percent, the lowest in more than two months. The issue was trading at 8.175 percent at 1141 GMT.
The rand also erased all its early session losses, and was trading up 1.5 percent at a 10-day high of 7.8265 against the dollar after analysts said South Africa’s inclusion in the index might attract as much as $9 billion of outside money.
“Around $1.5 to $2 trillion is believed to track the index,” said Peter Attard Montalto, an emerging markets economist at Nomura International in London.
“South Africa would have a weight of around 0.43 percent and that would mean there would need to be around $9 billion of South African government bond-buying by index trackers. That equates to 8.9 percent of the total outstanding – huge.”
Citigroup said South Africa was currently in a three-month “monitoring period” to make sure it met index entry requirements based on issue size, ease of entry and credit rating. It passed the three tests in April, Citigroup said.
“If South Africa continues to meet all WGBI criteria with the May and June 2012 profiles, it will become the first African government bond market to be included,” it said in a statement.
Inclusion in the index would be a huge boost for the government after all three major ratings agencies cut the outlook on its credit rating over the past six months.
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The index currently has 22 countries and the only other emerging markets are Malaysia, Poland and Mexico.
“The big thing about it is it will add a new investor base into South Africa,” said Leon Myburgh, sub-Sahara Africa strategist at Citigroup in Johannesburg.
He said the U.S. bank expected new inflows of $5 billion, although it might be as much as $7.5 billion – compared with the volume total market size of $88 billion.
A final announcement is expected at the end of June, and South Africa’s formal inclusion would then commence in October, Citigroup said.-Reuters
