As we stand in the early months of 2026, the South African debt capital market is a very different landscape from the one we anticipated just over a year ago. The year 2025 was not merely a period of recovery; it was a year of continued repricing and exceptional returns, with the FTSE/JSE All Bond Index (ALBI) delivering a remarkable 24.24%. Now, as the market enters a phase of normalisation, the narrative has shifted from broad-based gains to a more nuanced story of selective opportunities and powerful technical forces.
Looking back on 2025
Reflecting on 2025, the performance of South Africa's debt capital markets was defined by a robust confluence of factors that frequently surpassed expectations. While gross bond issuance saw a marginal decline, the net growth of the bond market nearly doubled, underscoring investor demand that characterised the period. This was driven by various factors including improving domestic credibility and a favourable global search for yield.
Three primary forces were instrumental. Firstly, a surge in issuance from State-Owned Enterprises (SOEs), which jumped by 71%, played a pivotal role. Transnet’s landmark public auction, its first since 2022, was met with exceptional demand, signalling renewed market confidence in key state entities undergoing reform.
Secondly, the market continues to witness significant spread compression. Senior bank spreads tightened by as much as 21 basis points, while Additional Tier 1 (AT1) capital spreads narrowed by a remarkable 51 basis points. This tightening was a direct consequence of an improved fiscal outlook and strong global demand for yield-bearing assets.
Finally, this was all underpinned by exceptionally strong investor appetite. The third quarter of 2025 alone saw R65 billion in net inflows into local collective investment schemes, the second-highest quarterly figure on record. The primary surprise of the year was not that the market would perform well, but the sheer magnitude of this demand, which consistently outstripped supply and led to pricing that was tighter than most models had predicted.
2026 – what now?
As we move through 2026, the prevailing view is one of cautious optimism.
The fundamental economic backdrop is one of modest improvement, with inflation expected to remain within the South African Reserve Bank's (SARB) new 2%-4% target range. However, the strong rally in 2025 has left valuations stretched, with spreads trading at multi-year lows. This leaves a very limited margin of safety, leading to a more defensive and selective investment posture.
The challenge, however, is that corporate credit spreads are at multi-year lows, meaning the extra yield for taking on credit risk is historically small. This can make the market seem fully valued, or “priced for perfection.” Even so, attractive value can still be found within the South African market itself. While average spreads are tight, a selective, considered approach can uncover high-quality corporate bonds that still offer a worthwhile yield premium for their specific risk profile. The focus must shift from the overall market to identifying individual issuers whose fundamentals justify their pricing, allowing discerning investors to find value even when the broader market appears expensive.
The dominant theme for 2026 is undoubtedly that of the debt redemptions (i.e., maturing debt). Total redemptions are set to increase by 35% to R167.6 billion. A huge component of this is a 130% jump in SOE redemptions, dominated by Eskom’s R38 billion government-guaranteed bond maturing in April. This single event is poised to inject a substantial amount of liquidity into the market as investors look to reinvest the proceeds, creating a strong technical support for bond yields.
However, the era of easy capital gains from spread compression appears to be over. Consequently, the story for 2026 is about a shift in the source of returns. The key to success in this new chapter will be to avoid complacency. Tight pricing leaves little room for error. The market of 2026 is not one that will lift all boats; it is a market where careful credit analysis and harnessing available opportunities will be the primary drivers of performance. While the strong technical support from redemptions provides a constructive backdrop, selectivity and a keen eye for relative value will be the defining features of the year ahead.
Disclaimer
Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612). No action should be taken on the basis of this information without first seeking independent professional advice.
Please note that there are risks involved in buying or selling a financial product, and past performance of a financial product is not necessarily a guide to future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. There is no guarantee in respect of capital or returns in a portfolio.
The information contained herein is provided for general information purposes only. The information and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions and views expressed in this document may be changed without notice at any time after publication and are, unless otherwise stated, those of the author and all rights are reserved. The information contained herein may contain proprietary information. The content of any document released or posted by Prescient is for information purposes only and is protected by copy right laws. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information. For more information, visit www.prescient.co.za
