Bond market powers ahead

Uncertain market conditions lifted turnover in the local bond market by 27.4% to R7.9 trillion in the seven months to July, from R6.2 trillion for the same period last year.

Garth Greubel, CEO of the Bond Exchange of South Africa (BESA), says the increase in turnover can be attributed to several factors that taken together, have contributed to the uncertain market outlook in 2007.

According to Greubel, the more volatile market has been driven by external factors such as increases in the Reserve Bank's repo rate, the general re-assessment by foreign investors of the risk-reward payoff of investing in emerging markets and the depreciating rand.

He contends that the local fixed-income market will continue to benefit from these market conditions as well as the continuing growth of the corporate bond market.

"Furthermore," continues Greubel, "the market will also benefit from private equity and black economic empowerment deals which are funded through debt. And thats not forgetting the proposed infrastructure spending by the government which will underpin additional debt issuance by government and state-owned enterprises."

Looking more closely at the figures shows that the market is powering ahead on all fronts. The number of matched bond trades in the seven months to July surged 8.4% to 194 000, compared to 179 000 in the corresponding period in 2006.

Non-government bond volumes increased 38,6% for the first seven months of the year compared to the same period last year, whilst government bond volumes increased 27,6%. The month of July, in particular, has been a record month, with bond market volumes touching a new all-time high of R1.388 trillion, the previous record monthly volume being R1.2 trillion.

Greubel explains that central government's borrowing declined during the first half of 2007, in line with National Treasurys budgeted lower borrowing requirement for the current fiscal year.

However, this has created space for corporates to tap the market and exploit governments reduced supply of fixed-income paper. Overall, corporate borrowing on the fixed-income market has increased by 40.6% year-on-year as at the end of July 2007.

While banks maintain their prominence as issuers of such paper, the issue of paper from other corporates recorded an impressive annual growth of 47.3% during the first seven months to July 2007 compared to July 2006.

In addition, over the same period, securitizations have grown at an remarkable pace of 59,3% year-on-year. Turnover in securitization issues constituted just over 53% of the total turnover in corporate paper.

The Exchange also recently added NamPower, Namibia's national power utility, to its listing board. This dual listing on the Exchange is aiming to raise R3 billion for the expansion of Namibias transmission network interconnection to neighbouring Zambia, of which R500 million has already been issued.

It is clear that the corporate bond market has room to grow especially with the increasing interest in the market being shown by international players.

Looking back, since market turnover reached its record level in 2002 at R11.7 trillion, annual bond turnover reported on BESA has ebbed, dropping to R8.1 trillion in 2005.

This decrease in turnover coincided with external events such as increased macro-economic stability, declining consumer price index figures as a result of the Reserve Bank's inflation targeting and a decreasing repo rate.

However, against all expectations nominal turnover increased during 2006 by 41% to R11.4 trillion, close to the turnover levels last seen in 2002. The rebound in 2006 has continued strongly in 2007, and with the on-going uncertainties in world markets, is set to continue.

Turning attention to other products, derivatives trading on BESAs Intersec OTC platform for 2007 is up 11.3% in terms of the number of deals and 143% in terms of total volume, on an annualised basis. Transaction volumes are evenly distributed between FRAs and interest rate swaps.

Another development in the past seven months was the Government Bond Exchange Traded Fund (GOVEX), the first exchange traded fund (ETF) listed on BESA and the first fixed income ETF in South Africa. The GOVEX tracks the BESA Government Bond Index (GOVI), which measures the performance of South African Government Bonds in which Primary Dealers are obliged to make a market.

Greubel enthuses that BESA has over 10 years proven itself to be an effective self-regulator offering a sound and low-cost platform for the trading of fixed-income securities in the local market.

From an overall business perspective, BESA has its focus firmly on building better markets:

* By being an effective regulator offering better systems and straight through processing for securities transactions

* By operating markets that offer a wide range of tradeable products

* By providing low cost platforms and value-added services