The South African – United States Sovereign Bond Spread and its Association with Macroeconomic Fundamentals

The yield spread of South African to United States 10-year government bonds over the last 5 years has increased substantially to levels approaching those last seen during the mid-1980s. This yield spread increase is replicated in spreads relative to long-term German bonds, as well as for the spread of state-owned enterprises (ESKOM) to United States and German bonds. This paper examines the association between the spread and macroeconomic fundamentals over the 1960-2019 sample period, under the GARCH and GARCH-M class of estimators. We find that higher South African economic growth, lower inflation, public and private debt, as well as Rand-Dollar appreciation are all associated with a statistically significantly lower South African - United States yield spread. The strongest impact is associated with the public debt to-GDP ratio. Mean spread levels do not appear to be influenced by yield volatility. Finally, while there is no evidence of sign bias in the impact of shocks on yield volatility (negative shock impacts are no different than positive), there is evidence of size bias for both positive and negative shocks: larger shocks have a larger impact on volatility than small, regardless of their sign. Collectively, and even ignoring the impact of private sector leveraging, South Africa’s performance in these macroeconomic fundamentals is associated with an increase in the SA-US yield spread of 363 basis points (since 2012). This constitutes a substantial proportion of the current 741 basis point spread.