Chart of the Week
The 10-year generic yield is a ‘constant maturity’ bond yield of a country which can provide valuable insight into investors’ sentiments towards a country’s current and long-term prospects.
The yield is a good economic indicator because it includes risk premiums, such as a term premium and a credit risk premium. The term premium considers factors like inflation risk, recession risk, supply and demand, as well as cyclical effects embedded in holding an instrument for longer than one year.
Credit risk considers the risk of default and the effects of Government’s fiscal outlook.
In South Africa, the 10Y bond yield has deteriorated significantly on the back of increased risk in the South African economy, with investors demanding a higher risk premium (higher risk = higher yield), says Amy Walters, financial analyst at Cirrus Capital.
In Namibia, however, the economic outlook is more optimistic than in South Africa and would suggest lower risk equals lower premiums.
Tug of war
But there has been a tug of war in yields, according to Walters.
As observed previously, the Namibian 10Y has historically traded at a higher absolute yield than the SA 10Y (average SA10Y: 9.3% vs NAM1OY: 10.2%). But Namibia has started to delink from SA over the last year, now trading below the SA10Y.
“I believe this is justified. However, some market participants are of the view that Namibia’s yield curve should trade above the South African curve because of our fixed exchange rate regime and other factors. If the economic outlook for Namibia is expected to be materially better compared to South Africa, does this justify a higher risk premium, ultimately higher 10Y yield?" Walters asks.
The yield is a good economic indicator because it includes risk premiums, such as a term premium and a credit risk premium. The term premium considers factors like inflation risk, recession risk, supply and demand, as well as cyclical effects embedded in holding an instrument for longer than one year.
Credit risk considers the risk of default and the effects of Government’s fiscal outlook.
In South Africa, the 10Y bond yield has deteriorated significantly on the back of increased risk in the South African economy, with investors demanding a higher risk premium (higher risk = higher yield), says Amy Walters, financial analyst at Cirrus Capital.
In Namibia, however, the economic outlook is more optimistic than in South Africa and would suggest lower risk equals lower premiums.
Tug of war
But there has been a tug of war in yields, according to Walters.
As observed previously, the Namibian 10Y has historically traded at a higher absolute yield than the SA 10Y (average SA10Y: 9.3% vs NAM1OY: 10.2%). But Namibia has started to delink from SA over the last year, now trading below the SA10Y.
“I believe this is justified. However, some market participants are of the view that Namibia’s yield curve should trade above the South African curve because of our fixed exchange rate regime and other factors. If the economic outlook for Namibia is expected to be materially better compared to South Africa, does this justify a higher risk premium, ultimately higher 10Y yield?" Walters asks.
Comments
Namibian Sun
No comments have been left on this article