Liquidity problems in the bond market are always a cause for concern as this impacts the efficient functioning of the bond market during the process of capital allocation in the economy. Therefore, it is an expected role of the South African Reserve Bank (SARB) as other central banks to intervene in the domestic interest rates markets when challenges such as liquidity persists. We therefore saw the SARB intervene in March of this year by announcing its bond buying programme in the secondary market to provide liquidity after it became apparent that the domestic bond market was experiencing liquidity problems during the period leading to Moody’s downgrade and the Covid-19 global pandemic. The central banks’ involvement in the market through asset purchase programmes such as quantitative easing (QE) is a familiar phenomenon. However, as SARB would want us to believe the reason for the SARB’s involvement was specific and limited to the provision of liquidity in the secondary market only and therefore more aimed at shoring up confidence as opposed to providing significant liquidity.
The SARB has bought R1 billion in March, R11 billion in April, R10 billion worth of government bonds in May and R5 billion in June- to put this in context the total average daily value traded in the secondary market including repos is more than R90 billion using the JSE’s May 2020 figures.
HOW DID WE GET HERE? - THE SOUTH AFRICAN RESERVE BANK INTERVENTION IN THE BOND MARKET AND ITS IMPACT THUS FAR
Covid-19 started to spread across the world at a rapid pace and the World Health Organisation (WHO) decided around early March 2020 to declare the virus a global pandemic. The South African government announced a lockdown which would start on the 27th March 2020, the same day as the Moody’s date of announcement of South Africa’s sovereign downgrade to sub-investment grade. Soon thereafter, the risk-off sentiment prevailed sending South African bonds into free fall like other worst hit emerging markets as global investor preference favoured safe havens.
The bond market began to experience liquidity problems and, as a result the bid-offer spreads widened significantly which bears testimony to the liquidity challenges in the bond market. This prompted the SARB to intervene by announcing that the central bank would buy bonds in the secondary market in order to provide liquidity. The SARB did not give details of how they would approach their bond purchases nor did the SARB give any indication of the amounts and the period the Bank would start and finish the bond buying programme.