* Rand crashes to above 18/$ before regaining ground
* Post downgrade bond selloff seen as much as $12 bln
* Still-high yields, coronavirus distraction may limit fallout
* Stock market pulled higher by firms that benefit from weak rand (Adds stocks)
JOHANNESBURG, March 30 (Reuters) - South Africa’s rand hit an all-time low on Monday after ratings firm Moody’s removed the country’s last investment grade credit rating and downgraded it to “junk” status - although the selloff did not deepen as some expected.
Like many emerging markets, South Africa’s assets have been hammered in the past two weeks as the spread of the coronavirus and an oil price rout sparked a broad market selloff that engulfed many riskier assets.
Compared with the start of February, the rand is now 20% weaker against the dollar, investors have dumped close to 50 billion rand of domestic bonds, and the market capitalisation of the stock exchange has slumped by 4.5 trillion rand.
On Friday, Moody’s downgraded the rating one notch to Ba1 from Baa3 and maintained a negative outlook. S&P Global and Fitch downgraded Africa’s most industrialised economy to sub-investment grade in 2017.
On Monday the rand hit an all-time low of 18.0800 per dollar in Asian trading.
But as of 1500 GMT it was 1.63% weaker on the day at 17.9460 per dollar, pulling back some way as traders digested the downgrade.
Bonds, meanwhile, recovered some ground, with the yield on 10-year government paper due in 2030 dropping 3.5 basis points to 11.61%, well shy of last week’s peak of 13.25%.
One key factor softening the selloff was the central bank’s decision to launch a “quantitative easing” style bond-buying programme and to ease repo terms for commercial banks, supporting demand and limiting the spike in the yield curve.
Another was the coronavirus-linked selloff that South Africa had already seen in the weeks preceding the downgrade.
South African bonds have joined a growing list of high yielding debt at a time when developing economies are slashing interest rates amid a slowdown that is set to drag the global economy into a deeper downturn than that seen in the financial crisis a decade ago.
“I would be cautious of turning overly bearish on the rand given the risk of a downgrade was baked into the local currency,” said Kieran Siney of ETM Analytics.
The Moody’s downgrade will see South Africa kicked out of the benchmark World Government Bond Index (WGBI) of local-currency debt at the end of April, triggering up to $12 billion of forced selling, treasury and analysts estimate.
But some analysts expect a slower outflow, with hot money chasing high yields likely to pick up a chunk of the excess supply.
“Unwinding will follow different rules for different asset managers and there may not be a rush into selling,” said Cristian Maggio of TDM Securities, adding valuations globally had cheapened due to the coronavirus.
“So while some investors may be selling, others will be buying. Therefore, we may see limited, if anything, moves in the bond space.”
Another factor likely to shield bonds from a deep and prolonged selloff is the relatively high rate of return, or yield on South African debt compared to similarly rated peers.
“You can buy a 10-year SA bond and earn real yield of 4.7% compared to a 10-year Brazilian bond that only pays 2.6%. Brazil has been sub-investment since 2016,” said Eugene Visagie, portfolio manager at Morningstar Investment Management SA.
Visagie said falling out of WGBI meant South Africa could enter sub-investment grade indices, such as the Global High Yield Index, where it would have a higher weighting.
He added that the recent jump in bond yields to around 12% had pushed up the real yield to around 7.5%, making government bonds “an excellent investment opportunity”.
Overall, stock markets closed higher, with the Johannesburg Stock Exchange’s Top-40 index rising 1.49% to 39,757 points and the broader all-share index up 1.09% to 43,414 points.
Ryan Woods, trader at Independent Securities, said the blue-chip index was pulled upwards by stocks that tend to benefit from a weaker rand, like miners that export their product or firms with an overseas presence and therefore a rand hedge in place.
But others took a hit, such as banks and retailers. Lender Absa fell 12%, leading the blue-chip index lower, followed by rival Nedbank, down 8%, and insurer Old Mutual, down 7.4%. (Reporting by Mfuneko Toyana; additional reporting by Karin Strohecker in London and Emma Rumney in Johannesburg; Editing by Olivia Kumwenda-Mtambo, Alison Williams and Hugh Lawson)
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