SA Bonds Predict Disaster

My article today does not involve gold or silver for a change. I am sure everyone who read my articles have by now seen the rapid rise in the precious metal prices as I predicted would happen. I would like to talk about government bonds today. A bond is basically an IOU that the bond owner ( SA Government ) gives an investor. The government borrows money from you ( Lets say a R1,000,000.00 ) and pays you a fixed interest ( called a coupon ) per year for the duration of the bond. The interest gets paid bi-annually. The period will vary from 2 to 10 years or longer. When the bond period ends they pay you back your R1,000,000.00. You can however sell your bond at any time you want to. Bonds are considered to be very safe as they are guaranteed by the government …….. unless the government goes bankrupt of course!

It is internationally accepted that a country’s bonds directly reflects the credibility of that country. The lower the interest (yield ) the safer that country is to invest in. Of course the higher the yield, the more risky it is to invest in that country. The money generated from selling bonds is typically used to improve infra structure and boost a country’s economic activity so as to improve GDP ( Gross Domestic Product ) The profits generated from such capital expenditure should then be used to pay back the investors in due course. This is economics 101. Unfortunately, all over the world, countries are using this money to pay their debt! So, my question now is! If they are not generating profit from the borrowed money, how on earth are they going to pay back the investors? Oooohhh …….. I know, they just borrow more money and leave their children to pay off the debt!.

A good recent example of how bond yields express a country’s credit situation can be seen form this graph of Turkey’s 10 year government bond. One can clearly see how the bond yield went up to over 20% during the financial crisis in mid 2018. The only way a government can get investors to buy their bonds if they are in trouble, is to offer a very high yield. For us as investors in South Africa, we need to keep an eye on our 10 year government bond yields. It really tells us what international investors think of the credit risk in South Africa.

The question on every one’s mind of course is where is South Africa’s bond yields at the moment? All over the world we see negative bond yields. Simply put it means that the investor must pay the bond issuer to hold the bond. The investor must pay the government to take his/her money! You will not earn any interest at all. The table to the left shows some governments with negative rates. It is also important to know that if you want to consider government bonds, you should do so when interest rates are at its highest. If you buy bonds when interest rates are low, you will lose money.

In the table to the left we can see some of the top paying 10 year government bond yields in the world. The first column in the table shows the bond yield and the second column shows the inflation rate. The last column then reflects the real interest rate over a period of a year. It is no secret that Turkey’s financial position is dire simply because president Erdogan refuse to increase interest rates to combat inflation. The net result is runaway inflation and nobody wants to invest in Turkey. The more scary fact is that our South African government bond are offering 8.38% interest per year. Does this mean we are on our way to a similar financial crises as Turkey? In the last week we have seen the rand take a huge dip from R13.86 to the current R15.27. The US-China trade war and specifically the Eskom debacle is costing us dearly. We will see gas and food prices start to rise soon putting more pressure on the already over indebted population.

In conclusion we must be aware of how our bond market develop going forward as our very financial survival depends on investors buying our government and corporate bonds to ensure liquidity so our country can carry on doing business world wide. The following articles is well worth a read.

Foreigners dumping SA bonds.

Protect yourself with physical gold and silver for it cannot be printed or digitized and will always be the ultimate store of value.