Rand Swings From Carry Loser to Winner as Bond Inflows Surge

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(Bloomberg) — South Africa’s rand is back near the top of the carry-trade table after languishing close to the bottom in the weeks following the outbreak of the Iran war.

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The rand has returned about 5% since the beginning of April for traders who borrow dollars to invest in higher-yielding emerging-market assets. That’s the most after Hungary’s forint out of 22 peers tracked by Bloomberg.

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Traders took a 4.7% hit in the rand-dollar carry trade in March, according to data compiled by Bloomberg. But now they’re flocking back to the nation’s high-yielding bonds after price swings eased to below pre-war levels. They’re also attracted by South Africa’s economic-reform story, according to Robert-Lee Griffith, a co-founder of risk management and global payments firm Currency Solutions.

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“The rand topping the EM carry table is no surprise when you look at the fundamentals,” Griffith said. “South Africa offers some of the highest real yields in the emerging world, and with the dollar soft and FX volatility subdued, carry conditions are close to ideal.”

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The South African Reserve Bank raised borrowing costs by 25 basis points to 7% last week, its first increase in three years, as it sought to stifle inflation from elevated oil prices. The central bank also signaled that more hikes may be needed to bring inflation back to the 3% target if the conflict persists.

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Implied volatility in the rand-dollar pair dropped to around 11% this week after spiking as high as 15.9% in March. That’s reducing the risk of holding rand assets to benefit from bond yields that are among the highest in emerging markets.

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Non-residents bought a net 37.29 billion rand ($987.91 million) of government debt since the beginning of April following a record 56.19 billion rand selloff in March, based on settled trades data reported by stock exchange operator JSE Ltd. 

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The benchmark 10-year yield has dropped 67 basis points to around 8.65% in that period, with only Turkey, Brazil, Colombia and Mexico offering higher yields among major emerging markets. The inflows are a sign of confidence in the rand and the South African economy’s resilience to the energy shock sparked by the Middle East conflict.

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“Investors are making a structural call on South Africa, not simply chasing a yield pick-up,” Griffith said. “When institutional money returns to the bond market after a period of selling, it tends to be stickier than currency flows alone.”

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