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South Africa’s yield curve conundrum

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  • Erasmus, Ruan
  • Steenkamp, Daan

Abstract

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
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    File URL: https://mpra.ub.uni-muenchen.de/115398/1/MPRA_paper_115398.pdf
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    References listed on IDEAS

    as
    1. Havemann, Roy & Hollander, Hylton, 2024. "Fiscal policy in times of fiscal stress (or what to do when r > g)," Journal of Policy Modeling, Elsevier, vol. 46(5), pages 1020-1054.
    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. repec:rbz:oboens:11019 is not listed on IDEAS
    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.
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    Cited by:

    1. Hylton Hollander, 2024. "Debt-financed fiscal stimulus in South Africa," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 48(1), pages 87-112, January.

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    More about this item

    Keywords

    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

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