Fixed-income analysts say SA bonds are poised for a better year after their horror showing in 2022 as their high yields lure investors back to the security of fixed income while inflation and interest rate expectations are moderating.
With consumer inflation having eased from a 13-year high of 7.8% in July, the Reserve Bank is expected to end its rate-hiking cycle after ramping up borrowing costs to the highest level in more than five years in 2022.
While some analysts expect one more 25 basis point (bps) rate hike later this month, SA bond yields — which move inversely to prices — are likely to fall noticeably after last year’s aggressive monetary tightening drove benchmark 10-year yields up 101 bps.
With an uncertain outlook for equities thanks to a fragile domestic and global economy, SA’s relatively high bond yields could make for a compelling investment opportunity.
With SA 10-year yields offering a premium of about 700bps over US treasuries of similar maturity, foreign investors could also be lured back to the local bond market after five consecutive years of net selling.
“The bond market had a tough 2022 and yields are high,” said Lyle Sankar, head of fixed income at PSG Asset Management. “We would expect strong outperformance from here, in what could be a multiyear opportunity to earn equity-like returns at bond levels of risk.”
Easing concerns
SA bonds are also likely to benefit from easing political concerns now that President Cyril Ramaphosa has secured re-election as president of the ANC, paving the way for a second presidential term.
The yield on SA’s 2032 bond had moderated to 10.6% by Friday’s close, down from 11.51% on December 1, the day speculation erupted that Ramaphosa would resign after a damning report on the Phala Phala scandal.
With the ANC electoral conference out of the way, analysts are likely to turn their attention back to inflation, global risks such as the Ukraine war, and signs the US Federal Reserve will cease the aggressive monetary tightening that sparked outflows from emerging markets in favour of dollar-based assets in 2022.
Investec economist Annabel Bishop says markets are already factoring in the chance that the Fed will reduce the quantum of its rate-hike increases as early as its February 1 policy meeting.
Fed funds futures show US rate hikes could slow to 25bps at the February meeting and to less than 25bps in March and May. Futures indicate that US rates should stabilise by about the middle of 2023 and may even begin to fall in the second half of the year, something that may entice foreign investors back to SA’s higher-yielding debt after they dumped a net R131.86bn of SA bonds in 2022.
Attractive
“Last year was one of the worst years for bonds globally. Returns were probably the worst in a generation, so the starting point for fixed-income assets this year is quite attractively priced,” said Victor Mphaphuli, head of fixed income at Stanlib Asset Management.
“With inflation moderating, we are quite close to the end of the interest rate-hiking cycle, which should propel bonds in 2023, though there will probably still be some volatility in the short term. SA yields are still very compelling.”
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