South African bonds extend gains as lawmakers back budget framework

South African bonds extend gains as lawmakers back budget framework

Investors have shown strong interest in South African government bonds, with the latest auction attracting significant demand. The weekly Treasury auction saw primary dealers place orders totaling 17.86 billion rand ($1 billion) for the 3.75 billion rand of securities on offer, marking the highest demand in almost three months [1]. This surge in demand is attributed to an improving outlook for the country’s fiscal health and a lower inflation target, which are expected to boost returns on fixed-income securities.

The adoption of a budget following months of political wrangling on tax increases and spending cuts has bolstered investor confidence. The resolution of the budget saga, coupled with easing tensions in the coalition government, has reassured investors that South Africa will meet its fiscal targets and curb government debt [1]. Additionally, signs that the central bank is working with the Treasury to lower its inflation target have further improved investor sentiment.

The South African Reserve Bank (SARB) recently cut rates, which has contributed to a bond rally. Yields on benchmark government securities have fallen to the lowest level in more than six months, with the yield on South Africa’s 2035 bonds decreasing by five basis points to 10.16% by 12:32 p.m. in Johannesburg [1]. Governor Lesetja Kganyago has argued for a lower inflation target, aiming to lead to interest rate reductions and faster economic growth in the long term.

The budget framework, which has been backed by lawmakers, is expected to save the government up to 870 billion rand in debt-service costs. The SARB and the Treasury have been in talks about a new framework since February 2024, with discussions ongoing [1]. This revised borrowing strategy, along with a lower inflation target, is likely to attract further investment in South African bonds.

In addition to the positive developments in the bond market, South Africa’s economy expanded in the first three months of the year, beating expectations. Transport and farming sectors contributed to this growth, indicating a robust start to the year [1].

References:
[1] https://www.bloomberg.com/news/articles/2025-06-03/south-african-bond-auction-demand-soars-as-budget-path-clears