Each point of debt-to-GDP adds 12 basis points to bond yields
A South African Reserve Bank study shows that a one percentage point increase in the government debt-to-GDP ratio raises sovereign bond yields and the term premium by 12 basis points. The dynamic estimation reveals that fiscal deterioration systematically steepens the yield curve.
Upward shifts across the curve
Using a large Bayesian vector autoregression on quarterly data from 2000 to 2024, author Luchelle Soobyah examines the transmission of fiscal risk across the yield curve.
The model incorporates Nelson-Siegel latent factors for level, slope and curvature alongside macroeconomic indicators.
Results show that an exogenous increase in public debt raises 10-year and 30-year sovereign bond yields while driving up credit default swap spreads and the term premium.
The overall level of the yield curve shifts upward by roughly 100 basis points at peak impact.
Concurrently, deteriorating fiscal metrics trigger currency depreciation and a growth slowdown, contrasting with standard Keynesian demand expansion.
A decade of missed stabilisation
South Africa's debt-to-GDP ratio rose from 44 percent in 2013/14 to over 70 percent in 2023/24, with National Treasury consistently postponing debt stabilisation targets.
The steepening yield curve reflects persistent fiscal deficits and heavy long-end bond issuance to finance state obligations, including support for utility Eskom.
Elevated sovereign risk weakens monetary policy transmission, as long-term borrowing costs remain high even during domestic rate-cutting cycles.
Monetary policy held hostage
The paper proves that fiscal slippage directly neutralises central bank rate cuts by keeping long-term yields elevated.
Attempting to stimulate growth through monetary easing is futile while public debt expands unchecked.
Without credible primary surpluses, monetary policy remains captive to Treasury deficits.