Cadiz Asset Management Managing Director and Chief Investment Officer, Sidney McKinnon, provides an update and overview of the fixed income environment.
South African capital markets once again came under pressure during May as the nation’s political ties with Russia are scrutinised and investors weigh up sanction risks. The SARB raised the reference interest rate by 50 basis points (bps) at the monetary policy committee meeting held in May. The hike was in line with expectations, but did little to appease the currency market as the Rand experienced a historic bout of weakness, reaching the weakest ever level against the US dollar.
Global investors once again had to contend with major central bank tightening monetary conditions in efforts to contain the still elevated inflationary environment. Among these was the US Federal Reserve who delivered its 10th consecutive rate increase, lifting rates by a further 25bps. Additionally, market participants had to contend with risks relating to the US approaching its debt ceiling, meaning the US treasury would not be able to borrow more money in order to fund the government’s financial commitments. This threat was thwarted, however, by Congress passing a debt ceiling deal just in the nick of time.
Given the SARB’s rate increase, we saw the South African money market curve steepen over the course of the month with the three-month Jibar rate increasing by 53 bps, while the 12-month Jibar rate increased by 70bps. These rates have risen by 360bps and 320bps respectively over the past 12-months compared to the 350bps increase in the Repo rate. The 12-month average T-bill rate also increased by 48bps in May.
International investors sold significant quantities of South African government bonds during the month, leading to a net outflow of R68.4 billion from this asset class. The cumulative outflow since the start of the year amounts to R216 billion.
The nominal bond yield curve flattened at the end of May, with the relatively short-dated R2030 yield increasing by a whopping 112bps, while the longer-dated R2048 yield only increased by 88bps. The FTSE/JSE All Bond Index (ALBI) returned -4.73% in May, mostly driven down by longer-dated bonds, with the 12 year+ portion of the index losing 5.71% and the shorter-end, represented by bonds with 1-to-3-years to maturity, only declining 1.70%
Like the nominal bond curve, the South African Inflation Linked bond curve flattened during May, with the I2025 real yield rising by 39bps and the I2050 real yield increasing by 37bps. The South African inflation-linked bond index (CILI) lost 2.3% during May with most of the negative performance attributed to the longer-end, where bonds with more than 12 years to maturity returned -4.20% and bonds with less than three years to maturity returning 0.28%.