Bonds are cheap, but the case for buying them rests on one number
A wealth manager told SAFM's market update that South African bonds offer good value, a call that turns almost entirely on where inflation goes next.
South African bonds are offering good value at current prices, according to a wealth manager who made the case on Moneyweb’s SAFM Market Update this week.
The argument, put by Marius Fenwick of WealthUp, rests on the relationship between the yield a bond pays and the rate at which prices are rising. When that gap is wide, a buyer of government debt is being paid a real return for lending the state money. When it narrows, the same bond is a worse deal even if its headline yield has not moved.
That is the whole of the case, and it is a case about a spread rather than about a price. South African government bonds have spent years offering some of the highest nominal yields among major emerging markets, a reflection of the risk investors attach to lending here. Whether that yield is generous or merely fair depends on what happens to inflation over the life of the bond, and on whether the country keeps servicing its debt on time.
For a reader with money in a retirement annuity, a living annuity or a money market fund, the practical question is narrower than the macro argument. Bond exposure inside a balanced fund is already priced at whatever the market thinks the risk is worth. A call that bonds are cheap is a call that the market has mispriced that risk, and it is a call that can be wrong for years before it is proved right or wrong.
The Moneyweb report did not carry a specific yield level, an inflation forecast or a target price to test the claim against, and this report repeats none of those because the source material states none of them. What it does establish is that a named wealth manager, speaking on a market programme aimed at ordinary investors, thinks the asset class is worth a look at current levels.
That is a position rather than a finding, and it should be read as one. South African savers who act on it are making a bet on inflation staying contained and on the state meeting its obligations, which is the same bet the bond market is already making on their behalf.
Source: Moneyweb, Good value in bond markets
