IDEAS home Printed from
   My bibliography  Save this paper

South Africa’s yield curve conundrum


  • Erasmus, Ruan
  • Steenkamp, Daan


South Africa’s sovereign yield curve is one of the steepest in the world. We show that South Africa’s curve has steepened over recent years and that this can be explained by an increase in the term premium embedded in long rates. We also show that marketimplied long term neutral interest rates for South Africa are high compared to both advanced economies and some emerging markets. Simple reduced form models of the term premium however struggle to explain its dynamics. We argue that the answer to resolving South Africa’s yield curve conundrum lies in improving our understanding of inflation and sovereign credit premia, as well as foreign exchange depreciation risk. Since a higher term premium tends to weigh on economic growth, we also argue that it is important for policymakers to use the policy levers that would help to reduce long term interest rates. These include strengthening the fiscal position, issuing government securities at a greater variety of maturities and lowering macroeconomic volatility - particularly related to high and variable inflation.

Suggested Citation

  • Erasmus, Ruan & Steenkamp, Daan, 2022. "South Africa’s yield curve conundrum," MPRA Paper 115398, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:115398

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    1. Roy Havemann & Hylton Hollander, 2022. "Fiscal policy in times of fiscal stress: Or what to do when r > g," WIDER Working Paper Series wp-2022-52, World Institute for Development Economic Research (UNU-WIDER).
    2. Bojosi Morule & Daan Steenkamp, 2018. "Occasional Bulletin of Economic Notes 2018/02- The structure of South Africa’s external position," Working Papers 8878, South African Reserve Bank.
    3. Tim Olds & Daan Steenkamp, 2021. "Estimates of banklevel funding costs in South Africa," Working Papers 11005, South African Reserve Bank.
    4. Luchelle Soobyah & Daan Steenkamp, 2021. "Has publication of a repo path provided guidance," Occasional Bulletin of Economic Notes 11008, South African Reserve Bank.
    5. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
    6. Matthew Greenwood-Nimmo & Daan Steenkamp & Rossouw van Jaarsveld, 2021. "Risk and Return Spillovers in a Global Model of the Foreign Exchange Network," Working Papers 11014, South African Reserve Bank.
    7. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    8. Luchelle Soobyah & Daan Steenkamp, 2021. "Occasional Bulletin of Economic Notes 2101 Has publication of a repo path provided guidance," Occasional Bulletin of Economic Notes 11019, South African Reserve Bank.
    9. Halil Ibrahim Aydin & Ozgur Ozel, 2019. "Term Premium in Turkish Lira Interest Rates," Working Papers 1933, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    10. Michael Callaghan, 2019. "Expectations and the term premium in New Zealand long-term interest rates," Reserve Bank of New Zealand Analytical Notes series AN2019/02, Reserve Bank of New Zealand.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gary S. Anderson & Alena Audzeyeva, 2019. "A Coherent Framework for Predicting Emerging Market Credit Spreads with Support Vector Regression," Finance and Economics Discussion Series 2019-074, Board of Governors of the Federal Reserve System (U.S.).
    2. Nguyen, Minh, 2020. "Collateral haircuts and bond yields in the European government bond markets," International Review of Financial Analysis, Elsevier, vol. 69(C).
    3. Chamon, Marcos & Schumacher, Julian & Trebesch, Christoph, 2018. "Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 114, pages 164-179.
    4. Venetis, Ioannis & Ladas, Avgoustinos, 2022. "Co-movement and global factors in sovereign bond yields," MPRA Paper 115801, University Library of Munich, Germany.
    5. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2010. "Option pricing for GARCH-type models with generalized hyperbolic innovations," Post-Print halshs-00469529, HAL.
    6. Mohamed Amine Boutabba & Yves Rannou, 2020. "Investor strategies and Liquidity Premia in the European Green Bond market," Post-Print hal-02544451, HAL.
    7. Lauren Stagnol, 2017. "Introducing global term structure in a risk parity framework," Working Papers hal-04141648, HAL.
    8. Virmani, Vineet, 2014. "Model Risk in Pricing Path-dependent Derivatives: An Illustration," IIMA Working Papers WP2014-03-22, Indian Institute of Management Ahmedabad, Research and Publication Department.
    9. Gauthier, Geneviève & Simonato, Jean-Guy, 2012. "Linearized Nelson–Siegel and Svensson models for the estimation of spot interest rates," European Journal of Operational Research, Elsevier, vol. 219(2), pages 442-451.
    10. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2010. "Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 143-178, September.
    11. repec:adr:anecst:y:1998:i:52:p:01 is not listed on IDEAS
    12. Schertler, Andrea, 2016. "Pricing effects when competitors arrive: The case of discount certificates in Germany," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 84-99.
    13. Guo, Feng & McCulloch, J.H., 2017. "Heterogeneous capital and misintermediation," Journal of Macroeconomics, Elsevier, vol. 53(C), pages 16-41.
    14. Hordahl, Peter & Tristani, Oreste & Vestin, David, 2006. "A joint econometric model of macroeconomic and term-structure dynamics," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 405-444.
    15. Marcin Dec, 2021. "Parsimonious yield curve modeling in less liquid markets," GRAPE Working Papers 52, GRAPE Group for Research in Applied Economics.
    16. Christian Bach, 2011. "Conservatism in Corporate Valuation," CREATES Research Papers 2011-32, Department of Economics and Business Economics, Aarhus University.
    17. Valentin Haddad & David Sraer, 2020. "The Banking View of Bond Risk Premia," Journal of Finance, American Finance Association, vol. 75(5), pages 2465-2502, October.
    18. Oliver Blaskowitz & Helmut Herwartz, 2009. "Adaptive forecasting of the EURIBOR swap term structure," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(7), pages 575-594.
    19. Ioannidis, Christos & Ka, Kook, 2018. "The impact of oil price shocks on the term structure of interest rates," Energy Economics, Elsevier, vol. 72(C), pages 601-620.
    20. Bueno-Guerrero, Alberto & Moreno, Manuel & Navas, Javier F., 2016. "The stochastic string model as a unifying theory of the term structure of interest rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 461(C), pages 217-237.
    21. Tong, Xiaojun & He, Zhuoqiong Chong & Sun, Dongchu, 2018. "Estimating Chinese Treasury yield curves with Bayesian smoothing splines," Econometrics and Statistics, Elsevier, vol. 8(C), pages 94-124.

    More about this item


    term premium; yield curve;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:115398. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.