Feb 28

Fixed Income Review

January was a welcome respite for South African capital markets, with inflation-linked bonds being the only major local asset class to lose ground over the month. The data released in January included a softer than expected inflation print for December, which came in at 7.2% YoY, in contrast to a consensus estimate of 7.3%.  Slowing inflation also played a role in the South African Reserve Bank (SARB) slowing the pace of its policy rate increases to 25 basis points (bps) in January. This increase was lower than consensus market expectations, leading to bullish sentiment from market participants. Loadshedding has, however, continued to be a dampener as the country nears 100 days of consecutive power cuts.

Global inflation has also slowed markedly, most notably in major developed markets such as the US. Investors are now expecting the tightening of financial conditions in the US to end near the middle of the year and the commencement of loosening conditions at year end.

The South African money market curve is now pricing in lower rates over the longer time horizon. The 3-month Jibar rate increased by 21 bps after the SARB hiked rates by 25bp in January. In contrast, the 12-month Jibar rate decreased by 18 bps. The 3-month and the 12-month rates have risen 336 bps and 281 bps respectively over the past 12 months. The 12-month Treasury bill average yield also compressed by 30 basis points at the January auctions. The STeFI index (a widely used cash-equivalent benchmark) returned 0.6% for the month.

The South African nominal bond curve bull-steepened nearing the end of the month as the shorter -dated R186 saw its yield fall by 64 bps, while the long-dated R2048 yield compressed by only 13 bps. The duration effect of the longer end of the curve outweighed the yield compression differential, however, as the short-end (1- to 3-years) returned 1.34% and the long-end (12+ years) returned 2.67% for the month of January. The South African All Bond Index (ALBI) returned 2.97% for the month.

South African inflation-linked bonds were the only major locally domiciled asset class to yield negative returns over January due to the lower-than-expected inflation print for December. The curve steepened, with the short-dated I2025 yield rising by 1 bp and the yield on the longer-dated I2050 rising by 21 bps. This is consistent with the expectation of inflation numbers returning to the midpoint of the SARB target band in the coming year. The South African Inflation Linked Bond Index (CILI) returned -0.97% for the month.