What 2026 holds for SA bonds

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JIMMY MOYAHA: As we wrap up the first trading week of the year I thought we’d take a look at some of the outlying markets which could potentially be of interest going into 2026.

We’re going to be looking at South African government bonds. They represent quite a big portion of portfolios. Whether you’re looking at retirement portfolios or looking at asset-management portfolios there is quite a big concentration of risk that sits within the bond market.

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I thought we’d take a look at that and see what 2026’s bond market could look like from an investment standpoint. I’m joined on the line by the chief economist at Investec, Annabel Bishop, to see what we make of it. Annabel, compliments of the New Year to you. Always lovely having you on the show.

Let’s perhaps start with a simple understanding of why we’re happy that government bond yields at this point are lower. They’re potentially at the lowest levels we’ve seen in more than five years since before the Covid-19 pandemic. Why is that a good thing?

ANNABEL BISHOP: Hi Jimmy, and happy New Year to you too. I think it’s great news that we actually have the benchmark government bond yield – and indeed bond yields as well – so low because they help in terms of that being the cost of borrowing for government, and corporates have bond yields.

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But you are referring to government bonds. If you look at the benchmark bond below 8.5% and of course close to 8%, that’s the yield on the bond, how much government would have to pay in terms of borrowing from the individual.

So when your yield is a 12% it’s much more expensive to borrow than when it is at 8%, for example.

JIMMY MOYAHA: You mentioned that 12%, Annabel. I can’t help but notice that that was as recently as just before the 2024 election, so it wasn’t that long ago that South Africa’s government bonds were exceptionally expensive – at least for the South African government.

JIMMY MOYAHA: We’ve seen that a lot has changed since our own elections. We’ve seen that the government of national unity, the GNU – where many have thought it would have failed and fallen apart at this point – has managed to get us through a full calendar year and is looking poised to continue with the momentum it has been able to build. Has that been something that investors have been looking toward in terms of security?

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We know that the South African market historically has always been driven by a bit of political uncertainty, which weighs in on investor sentiment.

ANNABEL BISHOP: Yes, Jimmy. I think that’s exactly the point. The benchmark bond yields that you’re talking about rose to 12.23% ahead of the elections in 2024. That’s of course, our national elections, and the biggest driver then was political risk. But there was concern that there would be a sharp deterioration in state finances if there was a left-leaning coalition.

That dissipated on the formation of the GNU. It didn’t immediately fall away, but it dissipated over the course of last year as the GNU proved they could work together, as you said.

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And then, of course, over the course of this year as well, with the opposition being able to stand up and say ‘no’ to increased expenditure and actually having a robust coalition, a robust government of national unity, that resulted instead in positive investor sentiment, as you said – fiscal consolidation.

We’ve also, of course, had SA off the grey list, let’s not forget. We’ve had a credit-rating update upgrade as well. All of these things are really positive to investor sentiment.

But key in terms of driving South Africa’s bond yields over the period has been expectations of US interest rate cuts.

The manifestation of these interest rate cuts in turn has increased risk-taking in global financial markets. That in turn has also benefitted South African bonds, emerging market portfolio assets and assets in general. So there has been a lot going for our bond market.

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Let’s not forget, Jimmy, lower inflation as well. And of course a lower inflation target and interest rate cuts. So many factors. One almost doesn’t remember all of them in one go.

JIMMY MOYAHA: And they all came through in one calendar year. I think what markets also needed to take stock of is a lot of positive surprises coming through to benefit the South African story.

Annabel, you touched on the US interest rate expectations, and I want to get your thoughts on the international markets. We know that for foreign direct investments, things like bond yields form a very important barometer to be able to measure the risk associated with investing in a country like South Africa as an emerging market country.

Given that such a large percentage of our bonds are foreign-owned as well, the countries varying anywhere from the US to Europe, anywhere in the world, what does that kind of foreign direct investment look at when wanting to see whether or not these yields are attractive enough?

ANNABEL BISHOP: If we actually look at this component you mentioned, foreign purchases of South African bonds, we actually saw R83.6 billion last year. That’s a little data from Bloomberg highlighting the improvement in investor sentiment, as you note.

But the net purchases really only happened in the last three quarters of the year, and in fact they really rose significantly in the second half of the year. So you’ve seen a switch in investor sentiment in the second half of last year – and of course that’s important.

In general, foreigners have been quite interested in South African assets, portfolio assets, bonds or equities, gaining as well.

We’ve seen a good flush.

Remember our largest export category is precious metals, which includes gold, platinum, also of course precious stones. We’ve seen their big run and really a huge run in gold prices. In fact it’s been a long-term phenomenon, the increase in the gold price. But it has really accelerated in the last couple of years – and of course most recently platinum prices as well.

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There has obviously been this move away from I think the stringency if people were looking at nationally defined contributions towards reducing the impact of climate change, reducing emissions under the Paris Agreement and, of course, the US potentially exiting that.

There has been much greater production of fossil-fuel motor vehicles than would have been expected. And of course, from an EV perspective, one would have thought you would have moved away from that. So there has actually been a lot of support from the platinum press as well.

But that precious metal rally is also expected to improve our government finances – again in contributing to government bonds, in aiding foreign investor sentiment. South Africa is known to be a gold exporter, and I think all of these factors are coalescing for South Africa to benefit significantly.

JIMMY MOYAHA: Speaking of benefitting, Annabel, I want to get your thoughts around what 2026 could hold, because some of the factors that you’ve outlined alongside factors like the inflation-targeting confirmation coming out of National Treasury towards the tail end of last year – some of those factors haven’t fully felt their way into the market.

At the start of this year, of course, we know that next month we’re heading into our main budget speech. That’s going to be the talk of the town.

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But I want to get your thoughts on how the 2026 year is kind of positioning itself from a bond perspective, especially when we look at South African bonds and their potential attractiveness. That 8.3%, 8.5% – still quite the numbers what we are happy with.

But with the positive momentum that sits within the South African story at the moment, is it too much to venture into perhaps breaching that 8% barrier?

ANNABEL BISHOP: Yes, I think a good point – and of course, if we have a look at our bond yield strengthened by 186 basis points last year, compared to only 82 basis points over 2024. So it’s been that acceleration over the course of last year that we mentioned and early this year.

In fact, if we have a look in general, there has been an acceleration for South Africa early this year in terms of rand strength and other financial market indicators.

But if you look, previously to that we saw sell-offs in 2022 and 2023, and also of course lower yields.

So really this big run-up in bond yields over I think more – maybe 170 basis points, 150 basis points over the last couple of years – we wouldn’t expect that 260 basis points to replicate again. So we wouldn’t say we are now at 2% and we’re going to get to 6%, for example; or even lower than that. But I think breaching the 8% yield barrier is a possibility because you’ve seen so much positive sentiment.

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What I mean by the 6% is that when our government did ratios, we were looking at borrowings of just above 20% to GDP. Now it’s closer to 80%. Of course that is not reflective of the tough environment we are in. A 6% bond yield would not be one where your borrowing trajectory is out at 80%.

You talked about what can we look for in 2026. Really, in this type of environment that we’re sitting in we have a lot of positive factors that are fed through; a huge number of positive factors have been fed through, but unfortunately we are still seeing some strain on government finances.

By that, if we have a look at the very latest data from National Treasury, the first eight months of the 2025/26 year show expenditure running at 63% versus 64% last year. But that’s because of the delay in budget. Of course, if we then have a look at the revenue, the revenue collection is at 59.7[%] versus 64[%] a year ago. So it’s not doing so well.

Now, what this translates into is that the deficit is already 80% of the budget, but we’re only at two-thirds of the year.

So you can see that it looks like there is going to be a bit of strain on the fiscal deficit, which in turn might result in an increase in borrowing. That’s the risk for our bond rally that we’re seeing.

Now, of course, we might see a big jump in the last few months of the year, and that’s four months remaining for government finance statistics. We might see quite a bit more coming through in terms of revenue. And if that does come through then it will obviously lower the problem.

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Government has also said it might have to increase taxes if we do see an overrun in terms of the deficit. So there are some risks, but there’s also positivity. And I think if we look forward, obviously there’s even a possibility of a further credit-rating upgrade coming through from Fitch, which is now one tier below S&P and Moody’s.

So overall I think we would not expect to see the same degree of phenomenal bond strength from where we are.

Certainly in the course of this year we might see a bit more; we might move to 8% and might even dip below that. But we would need further substantial positive outcomes to see a real big increase down towards a 6% mark, and that’s going to take a reduction in supply.

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In the 2000s, we actually saw debt buybacks that reduced the supply of bonds. And of course bond supply does have a big impact on yield.

JIMMY MOYAHA: Markets continue to weigh up the investment risk associated with South Africa, as reflected in the performance of South Africa’s bonds. It’s certainly shaping up to be an interesting 2026.

With all of the factors to consider, there is still quite a positive momentum for the South African story, and hopefully that is reflected in the bond markets in the future.

We’ll leave the conversation on that note. Thanks so much to the chief economist at Investec, Annabel Bishop, for joining us to take a look at South African government bonds and what 2026 year could hold for them.

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