Leon Krynauw. Picture: RUSSELL ROBERTS

Leon Krynauw. Picture: RUSSELL ROBERTS

Suggest equity or property to the average SA investor and chances are they are already involved in those assets or prepared to give them strong consideration.

But mention bonds and the odds are they will shy away from what they view as a subject too complex to contemplate. It’s a pity.

Once the basics are grasped, bonds are simple.

Bonds issued by government, parastatals and companies to raise debt capital normally have a fixed coupon (interest rate) paid annually until they mature on a date that is specified when they are issued. The benchmark government R186 bond, for example, was issued at a yield of 10.5% in 1998 and matures in three tranches between 2025 and 2027.

Over time many factors act to alter investor sentiment and the overall pattern of bond yields. Bullish factors that will bring down yields can include falling inflation, a declining repo rate and strong foreign buying. Bearish factors that will raise yields can include rising inflation, a higher repo rate and political uncertainty.

As with shares, bonds have an underlying price.

In a bullish scenario this price will rise on buying pressure, and because the coupon is fixed it will be reflected as a fall in yield. Similarly, if sentiment deteriorates investors will demand a higher yield and bond prices will be pushed lower.

It is no different from a share. When a share’s price rises its dividend yield falls and when its price falls its dividend yield rises.

So far this year bond prices have been rising, a trend reflected in falling yields. The R186 is now at 8.7%, down from 9.2% at the start of the year. For bond owners it has been a very rewarding ride.

In the first nine months of this year the JSE all bond index, which is a reflection of bond prices, delivered a total return of 15%, trouncing total returns of 5% from the JSE all share index and 8.8% from listed property.

For would-be bondholders, the question is: where to now? This is where it gets tough — but no tougher than making a decision about any other asset class.

"The SA Reserve Bank is at the end of its [repo] rate hiking cycle," says Leon Krynauw, fixed interest head at Sasfin Securities. It is a view broadly shared in the market.

"Normally I would say the top of a hiking cycle is a great time to buy," says Krynauw. "But this time it is hard to be certain."

Of concern for Krynauw are the many lurking uncertainties, not least the very real danger of a downgrade of SA’s sovereign credit rating to subinvestment-grade "junk" status.

At most risk is Standard & Poor’s BBB- rating of SA with a negative outlook. That is just one notch above junk status.

Henk Viljoen, Stanlib fixed income head, says: "SA will have to show it can deliver on critical issues such as labour reform, political certainty and government finances."

This also applies to SA’s ability to attract foreign bond buyers, who have so far this year invested a net R62bn in SA bonds.

"Before you get the next wave of buying by foreigners they will want SA to put some deliverables on the table," says Viljoen.

The view of a number of bond market players is that it is now time to play safe.

"We are close to the bottom of our [target] trading range," says Albert Botha, an Ashburton Investments fixed income portfolio manager. "At below 8.5% [on the R186] we will be inclined to sell and wait to buy into weakness at around 9%."

In similar vein Viljoen says: "I see bonds trading sideways in an 8.5% to 9% range."

Malcolm Charles, head of fixed interest at Investec Asset Management, is playing it more than a little safe. "We are holding very few bonds," he says.

From a yield perspective Charles sees no reason to take on risk. "You can get over 8.5% on a 12-month bank NCD [negotiable certificate of deposit]," he says.