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South African Bonds Are Losing Appeal on Risk of Budget Deficit

South African Bonds Are Losing Appeal on Risk of Budget Deficit
Commercial office buildings in the the Johannesburg Central Business District. Photographer: Waldo Swiegers / Bloomberg

South African investors have turned less positive on the nation’s debt on worries over the potential for a severe budget deficit, according to a survey by Bank of America Corp.

A bigger-than-expected deficit on Nov. 1 will mean the country’s Treasury will be forced to increase borrowing, according to 82% in the bank’s survey of 11 local fund managers earlier this month.

That risk is leading more funds to shun the debt even though the majority sees the bonds as undervalued, John Morris, a South Africa strategist at the bank, said in a note. Only 18% of the managers surveyed were bullish on local bonds over 12 months, down from 57% in July.

A government official said last week tax revenue is falling well short of targets, fueling concerns it will have to flood an already near-saturated market with increased bond issuance.

South African bonds extended declines on Monday, with yields on 10-year notes rising a seventh consecutive day. The debt has been under pressure since February after the government signaled an increase in borrowing in coming years to finance a debt-relief plan for Eskom Holding SOC Ltd., the ailing state-owned electricity firm.

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