History of South African Bond Markets

History of South African Bond Markets

• 1996: Bond Exchange of South Africa (BESA) established. Later became a wholly-owned subsidiary of the JSE.
• BESA was a self-regulatory body operating within the Financial Markets Control Act of 2012. This act's rules and directives were approved by the registrar of financial markets.
  • BESA membership included primary dealers in government debt, domestic issuers, intermediaries, and banking institutions.
• 2005: YieldX, an interest rate exchange, launched, focusing on derivative interest rate products.
  • Intended to open the interest rate market to new players and products, fostering liquidity and diversification.
• 2009: BESA became a wholly-owned subsidiary of the JSE. This merger maintained listing, membership, and clearing/settlement rules.
• 2010: YieldX became the Interest Rate and Currency market.
• 2011: Nutron, a new automated bond trading system, launched by the JSE. Replaced the older BTB and YieldX systems.
• JSE is the Johannesburg Stock Exchange, licensing rand-denominated debt securities.
  • These securities are issued by central/local governments, public enterprises and major corporations.
  • JSE is licensed annually by the Financial Sector Conduct Authority (FSCA) under the Financial Markets Act (FMA).

Characteristics of South African Bond Markets

• Well-established and mature despite ongoing development.
• More than 50% of debt on the JSE is issued by the South African government.
• Issuers include: South African government and state-owned entities (utilities and parastatals) and corporations and banks, as well as other African countries.
• Highly liquid, but turnover is restricted to large/benchmark issues. Small issues are common for local authorities.
• Bonds trade using yield to maturity (YTM) rather than price

Yield to Maturity (YTM)

• YTM is the internal rate of return on a bond held to maturity, assuming reinvestment of all coupon payments at that same rate.
• Investors focus on the return over the bond's entire life.
• The market often quotes yield instead of price, making it easier for comparison between bonds with different values and maturities.
• In South Africa, with volatile interest rates, YTM reflects market conditions more effectively. It is tied to the repo rate.
• YTM aligns with global practices and increases the competitiveness of South African bonds. Institutional investors benefit from this consistent measurement.

Implications of Trading on YTM

• Retail investors need to understand the link between YTM and price.
• Pricing behavior is still important for calculating YTM.
• Central bank policy can be informed by observing yields across maturities.

Example of YTM

• Imagine a bond (Bond A). Its price is ZAR 950, face value ZAR 1,000, coupon rate 10%, and maturity 5 years.
• The market would likely quote a YTM of 11.2%, representing annual return based on current price, coupon, and maturity.

Placement vs. Issue

• Issue: The creation and offering of new securities. Covers the entire process from creating the securities to putting them on the market.
• Placement: The method of distributing securities. Focuses on how and to whom the securities are being sold.
• Public vs. Private: Issues can be either public (like an IPO) or private, meaning that they are directly sold to investors