Conway Williams, Head of Credit at Prescient Investment Management
Credit spreads in the South African listed market have rarely been thinner. Before celebrating the rally, income investors should ask what the spread that remains is actually paying them for.
In the first half of 2026, the supply and demand conditions in the South African corporate bond market were unusually favourable for anyone issuing debt, and that had nothing to do with companies becoming better credits. Market research shows that new corporate paper came to market at around R32 billion, while close to double that, roughly R60 billion, was returned to investors as corporate and state-owned entity bonds matured. A market that shrinks in net terms while fund inflows continue can only resolve that imbalance one way, and it did.
Demand at corporate auctions averaged 3.7 times the paper on offer this year, up from 2.4 times in 2025, and auction after auction has cleared below the guidance range issuers went out with.
It is worth being honest about what this means. Balance sheets are broadly stable, not transformed. What has changed is the arithmetic of supply and demand. When 3.7 rand of demand chases every rand of paper, spreads compress regardless of credit quality. Investors are being paid for scarcity, and increasingly little else.
The tell is dispersion, or rather the lack of it. When credit risk drives pricing, weaker names should trade meaningfully wider than stronger ones, and sectors carrying genuinely different risk profiles should price accordingly.
What we saw in H1 was the opposite: the gaps between sectors, and between stronger and weaker ratings, compressed across the board as demand looked through distinctions that used to matter. Listed property is the clearest example. Lenders to property companies used to demand a healthy pickup over the best corporate borrowers. That pickup has largely disappeared, with a number of property names now funding at levels close to the strongest credits in the market. Some of that reflects genuinely improved sector fundamentals. Not all of it does.
The behavioural signals point the same way. Each new deal prints inside the last, so the reference point for fair pricing barely survives a month, and issuers timing their transactions behind others in the same sector are being rewarded for their sequencing rather than their credit quality.
It is our understanding that the market’s largest borrowers drew 25 and 26 investors to auction this year, in names where many investors had long since bumped up against their own internal exposure limits. That is not a change in credit opinion. It is money that has to go somewhere, finding somewhere to go.
None of this means the market is about to break. Money can keep chasing scarce paper for far longer than seems sensible, and nothing in the issuance pipeline for the rest of 2026 suggests the scarcity is about to ease.
But it is worth thinking about what could ease it.
Three candidates stand out.
- The first is a supply shock: a large corporate funding programme returning to the public market at scale, or bank issuance stepping up into refinancing needs.
- The second is a credit event. It takes only one high-profile default to remind investors that spread is meant to compensate for something, and at current levels the compensation on offer leaves little room for that reminder.
- The third is a reversal in flows. If income fund inflows slow, the marginal buyer disappears, and thin issuance cuts both ways: the same scarcity that supported spreads on the way in provides no depth on the exit.
What should investors do with this? Not abandon listed credit. It remains a core building block of income portfolios and the carry is real. But discipline matters more at these levels than anywhere else in the cycle.
Our approach is straightforward: we refuse to stretch down the quality curve for extra basis points that no longer compensate for the incremental risk, and we direct incremental capital to where the premium being harvested is real. There is a meaningful difference between an illiquidity premium, which compensates investors for a genuine constraint, and a scarcity premium, which simply reflects too much money chasing too little paper. The first is worth owning. The second is worth watching carefully.
The current environment rewards patience and punishes reaching. Spreads this compressed are not a reason to panic, but they are a reason to keep asking what the market is paying you for.
In much of the listed market the honest answer, for now, is scarcity. It is a question we ask ourselves on every deal we look at, and the answer has rarely mattered more than it does today.
ENDS
