During the second quarter of 2008, the Bond Exchange of South Africa Limited (BESA) recorded a material increase in total turnover, with daily trades averaging R87.8 billion and total monthly turnover increasing from R1.573 trillion in May to R1.755 trillion in June, the highest monthly volume ever recorded on the Exchange.
So says Monica Ambrosi, Manager: Market Research and Development at BESA. She adds: “Participation by foreigners in the local market accounted for 42% of the quarter’s turnover, while 62% of all the trades recorded were repo trades. Turnover velocity rose to its highest levels in 2008 and offshore trades in local bonds not reported to BESA for matching, but cleared domestically, also increased in June to R438 billion, the highest they have been since August 2007.”
Ambrosi explains that the increase in bond turnover volumes reflects a multitude of financial market developments at domestic and international levels.
“On the international front, consequences of the US sub-prime crisis became increasingly evident during the first half of this year as financial stress deepened. Uncertainty in the outlook for global economic growth resulted in increased risk aversion and demand for liquidity. Bond yields in more developed economies fell and stock markets weakened whilst inflationary pressures were stoked by higher international oil and food prices, posing significant challenges for central bankers.”
Although emerging economies appeared to weather the downturn considerably better, they were nonetheless unable to remain completely immune to these developments. Risk aversion and uncertainty were evident at the start of the year, when foreigners were net sellers of South African bonds. However, on a year-to-date basis, almost R20 billion worth of net inflows has been recorded in the local bond market, even after a decline in inflows in May following strong performance recorded in April earlier in the year.
Domestic bond yields have increased this year on the back of deteriorating domestic inflation. Expectations that the Reserve Bank would increase interest rates more steeply following its June monetary policy meeting (MPC) contributed towards pushing yields firmly higher.
“The yield on the R153, which at the start of the year was at 9.4%, had increased to 11.7% by 12 June, ahead of the MPC interest rate decision. While yields have since moderated slightly, the outlook for inflation remains uncertain and this, coupled with global economic uncertainty should bode well for turnover in coming months.”
Although the secondary market has benefited from these developments, the primary market unfortunately has not. Total listings on BESA increased by 5.8% year-on-year during the first half of 2008, with the annual listings growth rate slowing in Q2/2008 relative to the momentum recorded during the first quarter of the year. The average 6.2% year-on-year growth in total listings recorded in Q2/2008 was largely driven by corporate issuance including: banks; securitisations; and all other corporates, such as mining, insurance, food, telecommunications and transport companies; credit-linked notes (CLNs) and commercial paper (CP).
“Nonetheless, it should be noted that annual growth in securitisations slowed considerably to reach 4.7% in June, down from 35.3% in February. Indeed, the level in issuance for securitisations has declined consistently month-to-month since the start of the year with the higher interest rate environment and slowing domestic growth likely to maintain pressure on new bond listings throughout 2008” concludes Ambrosi.