OPINION | Fair value? Disentangling risk in SA government bonds | Business

  • 📰 News24
  • ⏱ Reading Time:
  • 88 sec. here
  • 3 min. at publisher
  • 📊 Quality Score:
  • News: 38%
  • Publisher: 80%

Malaysia News News

Malaysia Malaysia Latest News,Malaysia Malaysia Headlines

Longer duration bonds typically have higher interest rate sensitivity and experience relatively larger drawdowns than shorter maturity bonds for an equivalent increase in interest rates, writes neethlings. | News24_Business

SA government bonds endured a tough second quarter, delivering a negative return of 1.5%. Longer maturity issues were especially weak and sold off heavily alongside the rand, as adverse investor sentiment contributed to increased volatility in the domestic bond market.

In the absence of adjusting volatility for forward-looking estimates around expected asset returns, volatility is a relatively blunt risk management measure on a standalone basis.The graph below shows the volatility of rolling 12-month total returns of the FTSE/JSE All Bond Index as a proxy for the domestic bond market. It also shows the net monthly purchases of South African government bonds by non-resident or foreign investors over the last 10 years.

In secondary markets, bid-offer spreads provide an indication of the price and yield where buyers and sellers are willing to trade. High spreads indicate buyers and sellers are relatively far apart in terms of what they consider a fair price to trade. Foreign currency bonds are higher risk, but government has managed that exposure conservatively, with South Africa having relatively low levels of hard currency debt compared to emerging market peers. The country is, however, somewhat of an outlier across the EM complex in terms of exposure to contingent liabilities from failing state-owned enterprises and parastatals.

Higher duration does not necessarily mean higher risk. The starting yield and investment horizon are exceedingly important. The key question for investors is whether bond yields provide a sufficiently high margin of safety to compensate for potentially higher interest rates and inflation over their investment horizon.

Yield has historically been the biggest driver of total returns and is usually a good indication of the return investors can expect to earn by holding the bond to maturity. The above graph shows that besides the Covid-19-induced selloff in 2020, current bond valuations are at their most attractive levels since 2014.

 

Thank you for your comment. Your comment will be published after being reviewed.
Please try again later.
We have summarized this news so that you can read it quickly. If you are interested in the news, you can read the full text here. Read more:

 /  🏆 4. in MY

Malaysia Malaysia Latest News, Malaysia Malaysia Headlines

Similar News:You can also read news stories similar to this one that we have collected from other news sources.

WATCH | Rainforest countries form pact to demand conservation cash from rich nations | BusinessA dozen rainforest countries formed a pact on Wednesday at a summit in Brazil to demand developed countries pay to help poorer nations combat climate change and preserve biodiversity. | News24_Business
Source: News24 - 🏆 4. / 80 Read more »

Ramaphosa pays record price for a Boran bull | BusinessPresident Cyril Ramaphosa bought a Buran bull for a record price at a recent Mpumalanga auction, African Farming reports. | News24_Business
Source: News24 - 🏆 4. / 80 Read more »