Jan 31

Fixed Income

Cadiz Asset Management Managing Director and Chief Investment Officer , Sidney McKinnon, takes us through the fixed income environment for the new year.

The key driver of international fixed income markets in December was the US Federal
Reserve’s (Fed) projection of a total of 75 basis points (bps) cut in the Fed Funds rate by the
end of 2024. This translates to three 25 bps cuts over the period. In contrast, financial markets
started pricing in nearly six cuts, implying a difference of 50 bps between market expectations and the Fed’s projection. This caused the US 10-year bond yield to decline by 45 bps in December, ending the year flat. Looking at Europe, Germany’s 10-year bond yield declined by 42 bps in December, while the French and the UK’s 10-year bond yields declined by 46 bps and 64 bps respectively. The yield curve remains inverted in the US, Germany and the UK.

Locally, headline inflation for November slowed to 5.5% from the 5.9% YoY measurement in
October 2023. Core inflation remains sticky, though, edging up to 4.5% YoY as at the end of
November. Despite the moderation in inflation and an improvement in global risk appetite, foreign investors remained net sellers of our local bonds for the full calendar year.

South African bond yields declined from the short end to the belly of the yield curve, while
yields at the long end rose slightly. The yield on the R2030, a medium-term bond, decreased by 21.4 bps, while at the longer end of the curve, the R2048 increased by 1.1 bps. The FTSE/JSE All Bond Index (ALBI) returned 1.43% for December, delivering 9.67% for the year. Most notably, the 3 to 7-year and the 7 to 12-year sectors contributed the most to the overall performance of the local bond market. The shorter end of the curve, albeit not as notably, still delivered positive performance for the month of December.

The inflation-linked bond curve bull steepened in December, with the I2025 yield declining by
28.7 bps and the I2050 yield decreasing by 11 basis points. The FTSE/JSE Inflation-Linked Index (CILI) reported a notable return of 2.12% for December. Positive returns in the CILI were prominent in the 12+ sector, returning 7.34%. The 1- to 3-year part of the curve returned 0% and 5.49% in December and 2023, respectively, while the 12+ years returned 2.48% and 4.2%, in December and 2023, respectively.

The local money market curve bear steepened in December, with the 3-month JIBAR rate rising by 3 bps to 8.4%, while the 12-month JIBAR rate rose by 13 bps to 9.13%. Cash returns,
as measured by the Alexander Forbes Short Term Fixed Interest Index (STeFI), returned
0.65% for the period, bringing the year-to-date return to 8.03%.

The local currency remains at risk largely due to international market sentiment. Electricity problems and State-Owned Enterprises that continue to demand greater financial support
also continue to weigh negatively on the Rand. The Rand closed the month at R18.36/USD