It could prove to be the bond auction that swamped the South African market.

Demand at weekly sales of fixed-rate bonds has been well below average since the National Treasury raised issuance by 34% in May. Now it’s increasing the amount again, and the question is whether investors have the stomach to continue absorbing the pile of new debt at a cost the government can afford.

Last week’s sale of inflation-linked bonds -- although a smaller affair -- provided a clue: the Treasury was only able to allocate R1.6-billion of the R2-billion of securities on offer, after increasing the sale amount from R1.4-billion. That led to a sell-off in fixed-rate notes, with the 10-year yield jumping to the highest since mid-May.

“If Friday’s inflation-linked auction is anything to go by, it appears that we are finally seeing the brunt of an oversupply of bond issuance,” Tebogo Mekgwe, a fixed-income analyst at Rand Merchant Bank in Johannesburg, said in a client note on Monday. “We are certainly seeing a repricing of curves, making Tuesday’s nominal auction an interesting affair.”

The government caught investors off-guard on June 26 when it announced the increase in issuance to help plug a yawning budget deficit. Finance Minister Tito Mboweni said earlier that week that the government would tap international finance institutions and draw down cash deposits with the central bank to ease pressure on the local bond market.

South Africa’s consolidated budget deficit will widen to 15.7% of gross domestic product this year as the coronavirus lockdown takes its toll on the economy and tax collection, he told lawmakers.

Unlike the inflation-linked bond auctions, the weekly fixed-rate sales can’t fail, because the primary dealers who participate are obliged to buy all the debt on offer. The rising yields, however, are a reflection of waning bidding interest. Yields on 10-year fixed-rate bonds have climbed 35 basis points since that announcement to 9.53%, the highest among major emerging markets monitored by Bloomberg.

The Treasury will sell 2.2 billion rand each of notes due 2026, 2030 and 2048 on Tuesday.