Namibia: Demand for Govt Bonds Rises

An analyst says the demand for local government bonds in Namibia is soaring, despite signs of a looming global recession.

Indileni Nanghonga, analyst at Simonis Storm Securities, said this in their company's 'Namibian Fixed Income and Economics' publication for July 2019, released this week.

She noted that the local financial market has experienced a high demand of fixed income securities, which has led to the reduction of an actual return (yield) from such investments over the last seven months.

Fixed income securities generally are instruments that are used by governments, local authorities or organisations such as the World Bank and the International Monetary Fund, to raise money as a debt in the form of bonds and treasury bills.

Nanghonga said the upward swing in the average yield was largely as a result of increasing trade tensions between the USA and China amidst their trade war, and the possible credit downgrade of South Africa by Moody's.

"We expect the Namibian yield curve to be sensitive to benchmark movements in the coming months. However, high local demand could curb any significant increases resulting from benchmark increases," she explained, adding that any movement in South Africa's yield always translates to determine the local yields.

"Our view is that any huge increases in the benchmark yields could be offset by a continuous high local demand for domestic bonds, thus resulting in marginal increases in the local yields," Nanghonga stated.

As long as there remains economic uncertainty, financial instability and the geopolitical risk the country currently faces, South Africa's bond yield will continue to rise.

"The main factor currently impacting the South African government bond yields is the high bond outflows by foreigners. The South African government's decision to support Eskom has resulted in a higher probability of a Moody's downgrade of the SA investment status to junk," she added.

The inverse relationship between the price of a bond and its yield allows such movements - as the bonds yield increases, their prices decrease.

According to Monday's Namibian Stock Exchange daily statistics report, the central government had an outstanding nominal value of bonds tallying to N$35 billion.

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On a global scale, Nanghonga said the bond market yields continue to slump in the developed markets, with Germany being the latest giant recording its flattest yield curve since the 2008 housing market crash.

"The US remains the only developed market with a positive real return, although the spread between the two and 10-year bonds remains worryingly low, hovering around 20 basis points (bps)," she noted.

The dispute between the US and China has also spurred probabilities that central banks would need to cut rates more aggressively.

"We believe that the current bond yields have not priced in the risks faced by South Africa, Brazil and Namibia, given that the debt has increased drastically since 2008, while yields are trading around the same level seen in 2008," she said.

Additionally, Simonis Storm reported that the Namibian yield curve (bonds) slightly flattened in July 2019 due to the strengthening of medium to long-term bonds (GC30 to GC50) by 0,25%, in comparison to a 0,01% increase in securities with a short term before they mature.

"The flattening of the yield curve of the yield curve in July can be attributed to the downward shift in the benchmark yields, coupled with high local demand for bonds in both the primary and secondary market," she said.

Email: michael@namibian.com.na

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