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SIMON BROWN: I’m chatting now with Sylvester Kobo, who is the deputy head of fixed income at STANLIB Asset Management. Sylvester, looking back at Budget 2026, we’ve got debt stabilising at 78.9% of GDP this year; thereafter, expected to decline. We’ve still got that primary surplus and it is expected to widen over the medium term. Is this enough to keep the longer-dated bond yields low and perhaps even heading lower?
SYLVESTER KOBO: Simon, yes. We think it is – especially when you take into account the fiscal anchor that they mentioned that they will table at the medium-term budget. The bond market is buying into Treasury’s consolidation plans, and we think it will start pricing in more ratings upgrades this year and next year, which has to take out the risk premium at the long end of the term. So you expect another 50 basis points or so of yield compression – in that region.
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SIMON BROWN: Further you say there are also potentially some rating upgrades. To be clear with that, we’ll get the upgrades, but it’s going to take us maybe a little while longer before we’re sort of investment grade, because we’re quite deep into the sub-investment grade.
SYLVESTER KOBO: Simon, if you are to press me, then I would say the two-to-three-year story. And that’s likely based on the growth. If we can get a growth average of, say, 2% over the next two years, we think we’ll be back in that triple-B space. But the market is increasingly priced that in when you get different factors like the CDS spread, the shape of the curve, expectations over the next two to three years, we will be back in investment grade.
SIMON BROWN: Treasury has taken advantage recently of strong demand to increase issuances over the year. What is the appetite for South African government bonds, particularly from foreign investors at the moment?
SYLVESTER KOBO: SA for foreign investors is a compelling story. You just mentioned the possibility of upgrades. But when you look within the EM space and even in now developed markets space, you don’t find many countries that have an improving or better fiscal environment. We have contained inflation, good real yields and very deep and liquid markets. So, looking at some of the stats, recent stats, this week we bought half of the auction, last week it was 50% of the auction. And in January they bought — the biggest buyers of South African government bonds, totalling about R31 billion. So they still have breath, they still like the SA story.
SIMON BROWN: Okay, those are giant numbers. We’re seeing a fair bit of reform in sort of the SOE space. We had R1 trillion allocated to public sector infrastructure. It is still to be spent and the numbers are nice, but it needs to practically be spent. Are we seeing, if we look at the state-owned enterprises, the sort of sub-sovereign debt, is that market sort of tightening? Is it still cautious? What are we seeing in that space?
SYLVESTER KOBO: Yeah, I mean, SOEs, if you think four to five years ago, many of us wouldn’t touch them. But they’ve turned the corner. I mean, if you look at some of the reforms that have been taking place at the large SOEs, it is giving bond investors comfort, that we are past the worst, we have turned the corner there. And, you know, recently when looking at the 2025 for instance has been a big year for SOEs coming back to market. The likes of Transnet came back, and there they issued at about half the spreads that they were doing in the private placement space in 2024. So the market is warming up to this sector. IDC, DBSA were also very active in the market. The capital market last year issued at the tightest spreads continuously. The only challenge is just the municipal space. The municipalities – the picture is not improving there. So we hope Operation Vulindlela will be able to help in that regard. But the general SOE space is getting some love from the bond market.
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SIMON BROWN: And I take your point on municipalities. In the current situation, if you look locally, globally, where are you seeing opportunities in the local fixed income? Is it credit? Is it inflation-linked bonds? Where are you seeing the best opportunity?
SYLVESTER KOBO: So, the first thing, cash is very expensive. You need to be invested in fixed income and you need to be invested higher up the curve. So I use our Flexible Income Fund as a proxy for our best investment view within fixed income. One, we have a very heavy overweight in the nominal bonds, which have a duration at the higher end of the recent ranges. We are overweight inflation-linked bonds and credit, but as the hedge because market has rallied quite hard over the last year or so. And also with what’s happening globally, geopolitics and so much uncertainty, we have been buying US dollars to hedge against something going wrong in the portfolios.
SIMON BROWN: Ah, okay. Some dollars as well in this scenario. We’ll leave it there. That was Sylvester Kobo, deputy head of fixed income at STANLIB Asset Management, Sylvester appreciate the time.
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