It was the turn of bond markets on Monday to be the focus of a local selloff as investors globally turned their backs on fixed income amid speculation that an acceleration in inflation might be more than transitory.
As the rand held at a slightly weaker level close to R15/$, yields on the country’s 10-year bonds, which move inversely to the price, reached their highest level since May. The 12 basis point increase in the yield was the most since June, with local assets also put under pressure by oil at two-year highs and Europe facing an energy crisis.
The bond market, in which investors fund the government, is a key gauge of confidence in the government’s ability to fund its spending. Bonds also tend to rise when worries about inflation, which may lead to higher interest rates, intensify as faster increases in consumer prices make their fixed-coupon payments less attractive.
Investors will also be looking out for a level of demand as SA on Tuesday holds a regular weekly auction, hoping to raise a combined R2.6bn in securities due in 2035 and 2048. While a boom in commodity prices towards the end of 2020 helped ease pressure on the fiscus, investors are still wary of SA’s debt levels and historically high budget deficit.
“More weakness is possible going into tomorrow’s weekly auction,” RMB market analyst Deon Kohlmeyer said in a note, though he noted that the market could get support from investors using coupon payments from last week to load up on more stock. “But given the amount of offshore selling and local buying we have seen this month, it does feel like a significant portion of these coupons has already been spent.”
Demand for SA’s assets has also taken a hit from prospects of tighter monetary policy in the US, something that would push treasury yields higher. To compensate for that and to retain demand, SA yields would then need to rise.
In recent weeks, SA markets have also been roiled by turmoil out of China, a key market for SA’s commodity exports. Having been battered by concerns over the government’s crackdown on technology companies, and then the crisis of liquidity in its property sector, the world’s No 2 economy is also facing an energy crisis. Investors were left nervous after China’s central bank warned that growth was neither solid nor balanced.
Yields on the benchmark R2030 bond increased 12 basis points, or 0.12 percentage point, to 9.25%, the highest closing level since May 3. While that is way off the Covid-19 crisis-induced levels of 2020, yields increased in each of the past six days, reflecting growing risk aversion and some concerns of faster inflation. However, they are still relatively attractive compared with the 1.49% on offer for holding US treasuries.
By 6.32pm on Monday, the rand had barely moved at R14.9245/$, having dropped earlier to its weakest level in about a month, weakening to more than R15/$. For 2021, it is down 1.6%, which is still a far cry from losses among some of its emerging-market peers such as the Turkish lira with its drop of almost 16%.
“The rand breached the level due to weak economic data from China and also the fact that they currently have constraints in the energy sector,” said Andre Cilliers, a currency strategist at TreasuryONE. “All in all, this benefited the dollar and created a risk-off situation.” But the situation would normalise and the rand would trade back towards R14.70/$ soon, he said.
The JSE all share index closed 0.2% higher, matching lacklustre performances by its European counterparts. With Bloomberg
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