SA bonds: A new way to invest in a low-cost, low-risk vehicle

The South African bond market offers excellent value to investors; and, as of 17 November, flexible and simple access is available.

We explore the new investment avenue, and consider the ins and outs of investing in government bonds.

Tip: Learning about savings and investments can help you improve your financial outcomes in the long term.

What are South African government bonds?

South African (SA) government bonds are debt securities issued by the National Treasury on behalf of the government, to raise funds for various purposes, such as financing infrastructure projects. 

They are considered low risk, as they’re backed by the government’s ability to raise revenue through taxes and other means.

Bonds have different maturities - meaning, the time period by which the principal amount must be repaid to the bondholder varies (for example, three or 25 years).

The government must make regular interest payments to bondholders, usually once or twice a year.

What are the advantages of SA bonds?

Government bonds typically pay a predictable fixed income, known as a bond coupon. 

“If they’re held until maturity, the investor need not worry about market volatility or changes in valuation,” explains Nilan Morar, vice president of trading, and trading ops, at investment platform EasyEquities. 

“Bonds may not offer the same degree of capital growth as some equities; however, they do provide certainty in a portfolio. For example, if the annual coupon rate of a bond is 10% a year, that’s what you can expect to receive,” he says. 

Bonds have offered solid above-inflation returns over the years. The R2035 government bond currently offers a yield of about 11.7%, with a real return of around 5.8%, given the current inflation rate of 5.9%.

SA bonds offer great value, especially in the current economic environment. “Interest rates are at multidecade highs, which means bond prices are at multidecade lows,” notes Warren Ingram, director and founder of Galileo Capital.

How to invest in SA bonds – a new development

South African Retail Savings Bonds have been available for members of the public (individual investors) to purchase since 2004. Before this, only institutional investors could invest in the bond market.

There are three products to choose from: fixed-rate bonds with two-, three- and five-year terms; inflation-linked bonds with three-, five- and ten-year terms; and top-up bonds with a three-year term. The minimum investment amount is R1,000.

Investors are tied into these products until maturity, and will forfeit interest earned on their capital if they withdraw their funds. In addition, the products are priced by the current government bond yield curve, which means you can’t trade on the difference in yield between maturities. 

EasyEquities recently launched a product that allows individuals to invest in South African government bonds at different points on the yield curve, traded on the basis of all-in price (the price of the bond plus accrued interest) rather than yield (the earnings over a specific period).

You can choose from bonds with three-, seven-, 12-, 17- and 25-year maturities. There is no minimum amount to invest, and you won’t be penalised if you need to withdraw your funds or choose to sell your bonds. 

“As with most investments, liquidating [or selling] may realise a profit or loss that may in turn trigger a tax event,” Morar cautions.  

“You should consider your objectives and time horizon for investing – for example, you may want to save so you can pay school fees in a year.”

Morar advises that stokvels consider investing in fixed-income products such as government bonds. “There’s a predictable government-backed pay-out every six months, which is not always the case with other investments or cash, which are subject to a variable interest rate,” he explains. 

Morar says bonds are also now part of the spread of products available in EasyEquities’ tax-free savings account (TFSA). EasyEquities clients are automatically provided with a TFSA when registering on the site, and there’s no minimum investment amount. 

Are SA bonds a good investment? 

There is an opportunity for capital growth in the bond market, says Ingram – but this may only be realised in 2024 or 2025. 

“Many foreign investors will reconsider SA bonds once interest rates start declining in the United States and Europe,” he predicts. 

Investors may be concerned about the government’s ability to repay its debt in the future, but the short-term risk is low, and yields are consistent. Bonds may be more volatile in the future, however.

Tip: Is debt holding you back from investing in your future? It may be time to investigate debt consolidation.