Macroeconomic determinants of Long-term Sovereign bond yields in South Africa

Abstract

Recent developments in South Africa warrant a complete understanding of the fiscal dynamics within the economy. The government budget deficit has soured to unprecedented levels pushing the debt to GDP ratio above 60%. We seek to reveal in this paper the impact this has on the South African long term bond yield, which represents the cost of borrowing to government. Our approach entails investigating the determinants of the long term bond yield for South Africa using linear and non-linear single equation Auto-regressive distributed lag (ARDL) approach. Our results show that the short-term interest rate is the major determinant of long term yields in South Africa, showing a persistent positive and statistically significant relationship with the long term yield. Furthermore, we find that government debt and the US long term yield are positively related to long term bond yields both in the short and long-run. Our tests for linearity reveal that the short-term interest rate has a non-linear relationship with the long-term bond yield. The rate of inflation, nominal exchange rate and bank credit all have negative impacts on the bond yield in the long-run. Economic growth has a positive impact in the short run but impact the long-term yield negatively in the long-run. We suggest a coordinated approach between monetary policy and fiscal policy authorities, a systematic program of deleveraging and implementation of structural strategies aimed at increasing production.