Concerns that interest rates will remain high for longer persisted in global markets throughout October. The US Federal Reserve (Fed) held rates unchanged, and its statement made clear that it remains biased towards further tightening. Fed Chair, Jerome Powell, noted in his press conference that the committee is not confident that it has successfully tamed inflation or reached a stance that would deliver the desired 2% target. The US 10-year bond yield increased significantly by 36 basis points to 4.93% in October, while the US two-year bond rose by only 4.3 basis points to 5.1%.
Unsurprisingly, the European Central Bank (ECB) also left rates unchanged following 10 consecutive hikes. The German 10-year bond yield rose by three basis points in October, while the UK and France’s 10-year bond yields increased by seven and three basis points, respectively.
The local headline Consumer Price Index (CPI) rose to 5.4%, primarily driven by higher fuel costs, after the petrol price increased by R1.71 per liter in September. However, core inflation unexpectedly decreased to a 14-month low of 4.5%. Despite the acceleration in headline inflation, the prevailing viewpoint suggests that interest rates may have reached their peak.
The acceleration in headline inflation does not change our view that rates may have peaked,
and the South African Reserve Bank (SARB) is likely to keep rates on hold until there is evidence of a reduction in inflation risks. Absent of any surprises, we see the SARB beginning to reduce rates only in the second quarter of 2024.
Despite local bond markets in South Africa experiencing a degree of relief in October, after two consecutive months of negative returns, the JSE data continues to reflect an outflow of funds. The South African nominal yield curve bull steepened, with positive returns observed in the various sectors. In addition, the 3-7-year and 1–3-year sectors displayed positive returns of 1.34% and 1.1%, respectively.
Notably, the South African nominal yield curve bull steepened in October. This happens when short-term rates fall faster than long term rates, resulting in a higher spread between the two. The R2030 declined by 15 basis points, while the R2040 declined 9.2 basis points. The FTSE/JSE All Bond Index (ALBI) returned 1.74% for the month of October, bringing the year-to-date figure to 3.23%.
Examining the ALBI performance closely, positive returns in the Index were more pronounced in the 12+ and 7–12-year sectors, which delivered returns of 2.02% and 1.82%, respectively for the month of October. Additionally, the 3-7-year and 1–3-year sectors also experienced positive returns of 1.34% and 1.1%, respectively.
Conversely, the inflation-linked bond curve bear flattened, with the I2025 yield rising by 59.5 basis points and the I2050 yield increasing by 17.8 basis points. Consequently, the FTSE/JSE Inflation-Linked Index (CILI) reported a return of -0.96% for the month. Negative returns in the CILI were particularly prominent in the 12+ and 3–7-year sectors, returning -2.22% and -0.77%, respectively. In contrast, the 7-12-year and 1-3-year sectors displayed positive returns of 0.03% and 0.65%, acting as a partial offset to the negative returns observed at the ultra-long end and the belly of the inflation-linked curve.
The money market curve flattened in October. The three-month Jibar rate rose by three basis points, concluding the month at 8.36%, while the 12-month Jibar rate fell by five basis points, ending the month at 9.23%. Cash returns, as measured by the Alexander Forbes Short Term Fixed Interest Index (SteFI), returned 0.72% for the period, bringing the year-to-date return to 6.60%.
In October, the fixed income market witnessed a rise in US bond yields, contrasting with the domestic market that experienced a decline in yields following better-than-expected Core CPI data. Inflationary risks persist, however, driven by uncertainty surrounding fuel inflation and sticky food prices, while the Rand remains under pressure against the US dollar. Although the Rand exhibited modest strength in October, appreciating by 1.45% to close the month at R18.65/USD, ongoing domestic fiscal challenges will continue to exert pressure on the currency as well as bond yields, given the rising fiscal debt. Vigilance in monitoring these dynamics is crucial for navigating the economic landscape ahead.
We are looking forward to providing you with an update of the fixed income markets in the December edition of the Warwick Wealth Matters.