Bloomberg News

South Africa Yields Fall on Citigroup Index Inclusion

April 17, 2012

South African government bond yields fell the most in more than three years after Citigroup Inc. said the debt may be included in its World Government Bond Index.

The South African Government Bond Index met all requirements for inclusion in the global gauge in April, and will be included in October if it meets needs in May and June, New York-based Citigroup said in an e-mailed statement. The requirements are size, credit quality and a lack of barriers to entry, it said.

Inclusion in the index, a first for an African country, may fuel demand for South African bonds from investors who track the gauge, said Malcolm Charles, who manages Investec Asset Management’s 30 billion rand ($7.83 billion) South Africa bond fund. South African government bonds have been part of the JPMorgan EMBI indices for three years.

“Long-term it’s obviously very positive,” Charles said by phone from Cape Town. “It means the bonds will have an underlying bid. We have been in the JPMorgan index, which is exceptionally positive for the country, over the last three-odd years and if we get into the Citibank one it will be very, very positive.”

The yield on the nation’s 6.75 percent notes due 2021 fell 21 basis points, or 0.21 percentage points, to 7.727 percent, the lowest since Feb. 3. The decline was the most in a day since Dec. 17, 2008, according to data compiled by Bloomberg.

Foreign Investment

Inclusion in the index would result in an inflow of as much as $7.5 billion into South Africa as investors adjust their portfolios, Leon Myburgh, a Johannesburg-based analyst at Citigroup, said in e-mailed comment.

Foreign investors owned 29 percent of South African local- currency government debt at the end of 2011, according to Treasury data.

Citigroup said 11 South African local-currency bonds with a combined market value of $88 billion would be represented in the index. The bonds would have a projected weighting of 0.44 percent. The average coupon rate for the 11 bonds is 8.45 percent, compared with 2.78 percent for the index overall, Coura Fall, an analyst at Citigroup, said by phone from Johannesburg.

About $1.5 to $2 trillion is believed to track the index, Peter Attard Montalto, an economist at Nomura Plc in London, said in an e-mailed note.

South Africa’s debt would offer the highest yield on the index and may result in “further overweighting by even more passive funds,” he said. “This is highly significant in our view.”

Mexico Debt

Mexican government debt outperformed other emerging-market bonds ahead of its inclusion in the index in October 2010, Demetrios Efstathiou, chief strategist for emerging Europe at Royal Bank of Scotland Group Plc, said in e-mailed comments.

A similar “outperformance of the South African market should be expected in the near future, despite the historically very high allocations by EM Real Money funds to South Africa local bonds,” Efstathiou said.

Other emerging markets in the index include Malaysia, Poland and Singapore.

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net Stephen Gunnion in Johannesburg at sgunnion@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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