From below 8.5% at the start of July, South Africa’s 10-year government bond yield has climbed close to 8.7%. Read alongside what is happening in the rest of the world, this deserves considerable attention.
Global government bond yields have reached their highest level since 2008. The Bloomberg gauge of sovereign debt yields rose to 3.72% on 31 August, a level last seen in the middle of the global financial crisis. The 10-year US Treasury yield is near 4.8%. Japan’s 10-year yield rose above 3% for the first time in 30 years. Germany’s 10-year Bund yield is at its highest since 2011, and Britain’s is at its highest since 2008.
Three forces explain the move. Renewed fighting between the United Statesand Iran has raised fears of a prolonged disruption to oil flows through the Strait of Hormuz, pushing Brent crude to a one-month high. At around $97 a barrel, brent crude prices have jumped 11% in the past month alone and are about 47% higher, year-on-year.
Federal Reserve chairman Kevin Warsh has signalled that inflation, which has run above the Fed’s target for five straight years, remains the priority over supporting growth. Markets now price a roughly 70% chance of a Fed rate increase in September. Meanwhile, governments in Japan, the United Kingdom and the US are borrowing heavily, and investors are demanding more compensation to hold that debt for longer.
There is a fourth driver, too: large technology companies are selling bonds in chunky amounts to fund artificial intelligence investment. These firms now compete directly with governments for the same pool of investor capital, adding upward pressure on yields across the board.
Return of the bond bandits?
Some investors have started calling this coordinated increase in yields the return of the “bond vigilantes”, a term coined decades ago by Ed Yardeni for investors who punish governments running large deficits by demanding higher yields. Mr Yardeni himself is not yet convinced yields are prohibitively high. But the direction of travel is clear. Markets are once again pricing fiscal discipline, or rather the lack thereof, as a real cost.
South Africa should read this as a warning.
The 10-year yield at 8.9% is still well below the near 11% level reached in 2023, at the height of the load shedding crisis. But that comparison invites complacency. The 2023 spike was largely a South African story, driven by a domestic energy crisis and questions about the country’s fiscal path. What is happening now is a global repricing of the cost of holding long-term government debt, and South Africa borrows in a market that increasingly has higher costs.
This distinction matters for two reasons. First, it means South Africa’s borrowing costs can rise even if nothing changes domestically. If global investors demand higher compensation for holding any government’s debt, South Africa pays that price regardless of the finance minister and National Treasury’s efforts to consolidate spending. Second, it means the room for error has narrowed. A government that runs persistent deficits in a world where bond markets are already nervous about deficits everywhere will find willing lenders harder to come by — and more expensive.
The rand offers a second channel of exposure. It last traded at 15.99 to the US dollar. But if US yields keep rising and the US dollar keeps drawing capital away from emerging markets, the rand faces downward pressure independent of anything happening in Pretoria. A weaker rand raises the price of imported fuel and goods, feeding back into the inflation the South African Reserve Bank is trying to manage.
None of this is a case for panic. South Africa’s debt levels, while high, are not the immediate focus of the global selloff, and the country has weathered worse borrowing conditions in recent years. But the government should treat this moment as confirmation of the case for fiscal restraint. The world’s bond markets are demanding proof of discipline from every government that borrows heavily, developed and developing alike. South Africa cannot assume it will be judged separately from that global mood.
Chris Hattingh is executive director at the Centre For Risk Analysis (CRA).
