Today’s post by Tlotlego Tshegare shows that South Africa’s long-term sovereign bond yields have been elevated by emerging market standards. South Africa’s high sovereign yields reflected persistent fiscal and political risk premia and currency volatility that ranks among the highest in emerging markets. However, currency instability reduces the attractiveness of the currency for carry trade. Because the rand functions as an EM bellwether sensitive to global liquidity, its variance risk premium is also exceptionally high, embedding substantial exchange rate depreciation risk into the country’s steep yield curve. Over time, the transition to a lower inflation target could meaningfully compress this risk premium and lower long-term government debt yields, although our models suggest high inflation expectations continue to keep long rates elevated.
