African High Yield Bonds – What happens when equity yields significantly outperform bond yields?

South Africa and other investment grade rated developing countries need to cautiously watch the global movements of bond inflows. The yields in bonds are now significantly under-performing compared to the yields of equities in the largest global companies. This means that investors are eventually going to move their money out of bonds into equities, leaving countries that require bond issuance to set higher yields in order to attract investors. So far in 2019, global bond inflow was US$339 billion while the outflow in global equity was US$208 billion resulting in a decline in bond yields. Corporate stocks are therefore now providing dividend yields above the average yield of global government bonds.

The risk is that a sudden turn to global equities will leave the African developing countries with less investor interest in the yields of global government bonds. Government bond issuance would therefore become less attractive while there is already low take-up of equities in African developing countries. So what should be plan B? African investment grade countries need to rapidly pursue a more open and liquid equities market. This will make it conducive for private equity players to put assets up for IPO or direct listing.

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