South Africa to launch floating rate bond

In a bid to diversify its financial instrument offerings and attract a new pool of investors, the South African Treasury is set to launch its very own floating rate bond. This move comes at a time when fixed income investments are being closely scrutinized for their performance during economic downturns. To shed light on this new development, CNBC Africa spoke to Joan Gondo, a senior research analyst from Nedbank Corporate & Investment Banking. Gondo provided insights into the upcoming auction, revealing that the program size for the floating rate note is set at 80 billion rand. While acknowledging that reaching this full amount in a single day is unlikely, he highlighted the importance of establishing a substantial market presence with an issuance in the range of five to ten billion rand. This initial offering will serve to set the tone for future auctions and market participation. When questioned about the rationale behind the Treasury's decision to introduce the floating rate bond, Gondo explained that financial institutions such as banks, insurers, and pension funds were the primary target audience. These entities, with obligations linked to CPI and variable outflows, seek assets that provide a natural hedge and aid in risk management. Moreover, the introduction of this instrument is expected to enhance market diversity and offer investors a new avenue for asset allocation. The floating rate bond will serve as a short-duration instrument aligned with policy rates, providing an alternative to existing cash instruments like sovereign bonds and treasury bills. Investors, particularly those focused on the short end of the market and money market funds, are anticipated to show interest in this new offering. Gondo mentioned that the reaction from fund managers has been positive, with excitement stemming from the prospect of a new benchmark in the floating rate notes universe. Regarding the potential impact on liquidity control, Gondo noted that the floating rate bond could assist Treasury in managing excess liquidity within the monetary system. As the Reserve Bank transitions to an excess liquidity model, having this asset as a collateral option offers increased flexibility in liquidity management. The five-year tenure of the initial bond issuance is seen as strategic, with plans to tap into market demand through future auctions and possibly introduce varying tenors based on investor appetite. In conclusion, the introduction of South Africa's floating rate bond signifies a significant step towards enhancing the country's financial market landscape. With the potential to attract a diverse investor base, provide a hedging tool for financial institutions, and contribute to liquidity management, the bond is poised to make a notable impact. As market participants eagerly await the auction outcome, all eyes will be on the performance and reception of this innovative financial instrument.