Most analysts may be predicting South Africa will lose its last investment-grade rating, but derivatives traders couldn't care less.
Their bearish bets on the rand, measured by risk-reversal contracts, have fallen to the lowest level since before the 2007/08 global financial crisis. The premium of options to sell the currency in the next six months over those to buy it, known as the 25 Delta risk reversal, dropped to 2.42 percentage points on Friday, extending its fall this year to 1.2 percentage points.
That's despite Moody's Investors Service changing the outlook on South African sovereign debt, which it rates one step above junk, to negative on November 1. That gave the government perhaps only until February's budget to address its deteriorating finances.
The calmness in the options markets is largely because traders there had already anticipated a rating cut.
"Our baseline is for Moody's to downgrade to sub-investment grade after the February budget, but we believe this is priced in," Bank of America strategists David Hauner and Rukayat Yusuf said in a note to clients. "There should be a hiatus on negative fiscal headlines until then."
Staying bearish on South Africa is made more difficult when its yields are so attractive. Rates on rand government bonds average 9.3%, more than double the average of 4.2% among emerging-market peers, according to Bloomberg Barclays Indices.