September 2008, will be remembered as one of the most tumultuous times in the history of global financial markets. However, whilst markets worldwide grappled with spectacular collapses of renowned institutions and investment banks, activity in the domestic bond market quickened, resulting in record turnover volumes reported on the Bond Exchange for the quarter July to September 2008.
Monica Ambrosi, BESA’s Head of Research, explains, “Bond turnover volumes have been steadily increasing since April. This culminated in record monthly turnover of R2.011 trillion in September, just as the US financial system began to crumble. Average turnover per trading day also improved, reaching a record R95.8 billion in September. Cumulative turnover from January to September this year is 41% higher than that for the same period in 2007 and we now anticipate total annual turnover will be likely to breach R18 trillion. Domestic market velocity, in annualised terms as at September, was 30. When you also include offshore activity, this figure grows to 38.5.”
Looking at domestic versus foreign activity, local trade volumes remained high and stable during the quarter. However, in contrast, turnover by foreigners recorded on BESA increased in August and September, reaching their highest levels for the past 20 months.
Ambrosi continues, “The volume of South African bonds traded by foreigners offshore rather than via BESA also increased, peaking at R493 billion in August. Thus, in total, foreigner’s trading activity accounted for 46% of total turnover, inclusive of OTS numbers. In July, foreign transactions in domestic bonds made up 37% of total turnover, the lowest point for 2008. Overall, foreigners have however been net sellers of South African bonds for the year thus far.”
Domestic activity in the bond market contrasted the stance adopted by foreigners, remaining favourable on the back of an improved inflation outlook.
“Even though inflation data released by StatsSA for July and August showed that price increases had yet to peak, the decline in the oil price from August onwards, coupled with the scheduled revision of the inflation indices by StatsSA in January 2009, contributed towards increased interest in bonds. This was particularly the case in September when local clients were net purchasers of bonds to the value of R25.5 billion, which may also be attributable to the volatility and losses recorded on local and international equity markets.” she adds.
On average, over the past nine months, repo trades have comprised 60% of bond turnover volumes recorded by BESA. The proportion of repo trades also reached its highest level so far for the year in September at 66% of total BESA turnover.
“The increased appetite for repo transactions also highlights how the uncertainty permeating the financial sector has impacted on the bond market. Repo transactions recorded are a reflection of both speculative activity and liquidity requirements. Heightened repo activity was especially evident around days when financial markets received alarming news, particularly in September.”
Turning attention towards the primary market, average annual listings growth quickened marginally during the quarter relative to that reported during Q2/2008. However, it remained well off the growth recorded during Q1/2008 as the overall listings environment remained subdued.
“By the end of September, total listings had increased by R32.9 billion, relative to the end of June 2008. The bulk of this growth was concentrated in commercial paper issuance by corporates (R13.5 billion), central government (R11.25 billion) and state owned enterprises.”
Securitisations recorded a decline in the value of listings of R1.2 billion, after growth peaked at 35.3% year-on-year in February. This reflects multiple factors gripping domestic and international financial sectors, a slowdown in borrowing by consumers and businesses on the back of higher domestic inflation and interest rates, and general jitters in global credit markets.
“With the general economic climate set to remain tense until the end of 2008, issuance by the corporate sector is expected to remain moderate. Even though the yield curve has shifted substantially lower since June, issuance has remained constrained amid uncertainty and a slowing economy.” concludes Ambrosi.
