Fixed Income Review
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Local fixed income markets were characterised by a pause in interest rates instituted by the
South African Reserve Bank (SARB) during the month of July. The repo rate was kept constant at 8.25% signaling a possible peak in the interest rate cycle.
In contrast to the local scene, global central banks continued their hiking cycle to control
elevated inflation levels. The US Federal Reserve (US Fed) delivered another 25 basis points (bps) hike, followed by the European Central Bank (ECB) and the Bank of England (BOE) both raising rates by 25bps. US medium and longer dated treasury bond yields rose, thereby preserving the inverted yield curve phenomenon which has been a good predictor of looming recessions in the past.
Headline CPI inflation returned to the target range in June with a better-than-expected print
of 5.4%, down from 6.3% in May. The bulk of the slowdown in June was driven by food and fuel inflation, primarily due to base effects.
The South African money market curve continued to flatten over the month of July as the 3-month JIBAR rate dropped by 5bps and ended the month at 8.45%, while the 12-m JIBAR
rate declined by 30bps to end the month at 9.30%.
Local bonds maintained their positive momentum, resulting in the longer dated end of the
curve declining by more than 20bps over the period. The 1–3-year sector was up 1.40%, while the 12+ sector delivered 2.54%. The positive bias in the local bond market was largely reflective of the decline in inflation expectations and the recovery posted by the Rand as it made up some ground on other emerging market currencies. The positive sentiment is expected to continue in the near term alongside further disinflation. The FTSE/JSE All Bond Index (ALBI) was up 2.29% for the period.
The performance of inflation-linked bonds was mixed for the month of July. Despite the
better-than-expected inflation print, most of the returns from this asset class came from the longer-dated bonds. The 1–3-year part of the curve returned 0.38% in July, while the back end of the curve returned 1.97%. The South African Inflation Linked Bond Index (CILI) was up 1.44% in total.
Interesting times lie ahead for the fixed income markets as we navigate a landscape of global central banks apprehension, inflation uncertainty and heightened emerging market currency Volatility.
