The Iran war led to the biggest outflow from South Africa's bond market in at least six years as foreign investors lost interest in one of the most popular emerging market trades in recent months.
Non-residents sold a net R41.3 billion of government bonds last week, according to the latest JSE Limited data tracking settled trades. It is the largest weekly outflow on record since at least 2019, when Bloomberg began compiling data.
This is a sharp change from the first two months of the year, when foreign investors were net buyers of R28.6 billion of debt, according to National Treasury data. That was followed by big inflows in 2025, according to Deutsche Bank AG, which set the stage for a sell-off.
“We recommend remaining cautious until there is more clarity on the geopolitical outlook,” including strategists. Christian Wietowska Wrote in the note. Strategists last week reduced their exposure to South African government bonds.
South Africa's 10-year yield fell more than 300 basis points to a record low in February as investors took interest in the coalition government's economic programme, which included an improvement in the fiscal outlook and a planned reduction in debt issuance. Foreign investors increased their stake in fixed-rate bond holdings to 32% at the end of February, from 30% a year earlier.
Rally takes bonds into “bubble territory” Asad BhattiHead of emerging markets at Invesco Asset Management Ltd. That's changing as oil prices skyrocket due to hostilities in the Middle East, raising concerns that the South African Reserve Bank's 3% inflation target will be difficult to achieve for at least this year. Since the outbreak of the conflict, 10-year yields have risen 97 basis points to 9.1%, the highest among emerging markets.
In another sign of growing nervousness, the cost of insuring the country's debt against default over five years through credit-default swaps hit a five-month high.
'Heavily overweight'
“There are a lot of overweight positions in SAGB and many investors sitting on big profits, making it very easy for investors to sell their positions,” said Bhatti, who cut his position in 2048 securities last week. “South Africa's economy is also a net oil importer which has put it in the firing line.”
Some investors see the recent decline as a buying opportunity. A credible central bank, an inflation-targeting regime as well as fiscal consolidation are among the reasons South Africa is seen as a “positively re-rated” emerging market. Arif JoshiA senior portfolio manager at Bramshill Investments LLC.
Demand at the weekly government bond auction on Tuesday, although lower than last week, remained strong, with primary dealers ordering 3.5 times the amount of debt on offer.
“I'm going the other way, adding South African government bonds to this weakness,” Joshi said, adding that he expects the SARB to intervene in the market by buying bonds to add liquidity if the war drags on.
SARB spokesperson Thoraya Pandey Said the central bank could not comment as it was in a blackout period ahead of this month's policy meeting. Deputy Governor of SARB fundi tshazibana He told Bloomberg News last week that the central bank is monitoring markets and is prepared to act if any major irregularities emerge.
But investors shouldn't trust the central bank to save them philip fieldingA fund manager at Fidelity International in London. “It is not in their nature to move into the bond market and so far the flows have been orderly.”
If the war lasts longer and oil prices remain high, the central bank may end its rate-cutting cycle. The market has turned to pricing in two rate cuts to a 25-basis-point hike by the end of the year, which would put further pressure on bonds.
“Investors are taking risks in the wake of the Iran war, and South Africa has been caught in that crossfire.” Said Ruen NaiduA portfolio manager at Ninety One.