Government indebtedness and SA Retail Bonds: Seed Investments

28 Apr 10          

Ian de Lange of Seed Investments writes that over the months he has written about the general increase in government indebtedness as tax revenues come under more pressure, expenditure remains high and the interest on accumulated borrowings eats into a higher proportion of annual tax take.

One of the ways that the local government has looked to raise funds is by offering retail bonds. /p>

Typically the government via its treasury operation holds weekly auctions of fresh bond issues, where the major institutions put in bids on the new bond issues. The bids are cleared at a certain price.

For example last week the government auctioned R1,2 billion of its R207 bond and R0,9 billion of its R209 bond. Bids totalling R5,2 billion were received and the yield was 8,49% for the R207 and 8,685% for the R209. The R207 is a bond with a maturity on 15 January 2020 and R209 matures on 31 March 2036. These are long dated bonds, but the value of the bids gives an indication that there is still a large demand for this paper.

The medium dated R157, which matures in September 2015 is currently trading at 7,75%. Typically investors into bonds which have a longer dated maturity will command a premium for the higher risk. This is clearly seen in the yields quoted above. i.e. those investors willing to lend funds to the government for a longer period of time are paid a slight premium over medium dated bonds.  

The government has however given an additional premium to retail investors. By way of comparison the retail bonds have a maturities of 2, 3 and 5 year yet the rates are slightly higher than the bulk institutional interest rates. The current rate quoted for a 5 year maturity is 9,25%. This is therefore 1,5% higher than the current rate of the government R157 bond.

The rates on the 2 year is 8,75% and the 3 year 9%. The limit was R1m per person, but this has escalated to R5m per person. 

In addition to the fixed coupon bonds, the government also issued inflation linked retail savings bonds. Where investors are concerned that inflation will start to climb higher leaving their fixed coupon not compensating them, then they will want to consider buying the inflation linked bonds. The real rates on the 2 year is 2,25%, 5 year 2,5% and 10 year 3%.

Remember that these bonds are nothing more than the government borrowing money from its citizens. The loan agreements have defined terms, which the lender effectively agrees to. Included in these terms is a penalty for early withdrawal.