The impact of sovereign credit rating changes on government bond yields in South Africa

Abstract

This study applies an event study analysis on Standard & Poor's (S&P), Fitch and Moody's sovereign credit ratings for South Africa over the period 2007 to 2018 to investigate the impact of long-term foreign currency sovereign credit ratings changes on 30-year sovereign bond yield. Results of the analysis find a generally significant increase in bond yields before, during and after credit rating downgrades and negative outlook events. However, there was no statistically significant impact on bond yields associated with upgrades and positive outlook events. It is thus concluded that investors in South Africa's long-term bonds are more sensitive to negative credit rating events, which are mainly driven by structural problems in the economy. This paper recommends monetary and fiscal authorities to address the concerns raised by rating agencies in review reports leading to negative outlook and downgrades before they become more apparent to trigger negative rating actions.