The local bond market felt the heat on Tuesday as the US Federal Reserve’s unexpectedly hawkish tone on inflation spooked investors and led to a flood of selling.
Overnight comments by Fed chair Jerome Powell that the central bank was prepared to raise interest rates by half a percentage point at its next meeting if needed, saw the yield on the local benchmark R2030 bond jump as much as 20.5 basis points to 9.86% — the biggest increase since March 8 — before easing to 9.78% by the close of trade.
Bond yields move inversely to prices, with higher yields indicating that buyers are demanding a bigger premium for holding the debt.
Until Monday, markets had been expecting an increase of 25 basis points at each of the policymaking Federal Open Market Committee’s six remaining meetings for 2022. Powell’s comments, which were markedly more hawkish than a few days earlier, pushed the yield on the bellwether US 10-year Treasury notes to the highest level since 2019.
“Local bonds seem to have recorded bouts of strength and weakness over the month of March given changes in the global and domestic environment,” said RMB fixed income strategist Varushka Singh. “Risk sentiment has been volatile as investors react to geopolitical developments, global central banks’ narrative (particularly that of the Fed), commodity prices and how this may impact the SARB’s decision.”
The SA Reserve Bank is widely expected to raise interest rates by 25 basis-point at the conclusion of its monetary policy committee (MPC) meeting on Thursday.
James Turp, head of fixed income at Absa reckons Powell’s comments won’t necessarily prompt aggressive hiking by the SARB. At best, “Powell’s comments will influence a more hawkish MPC and might force a 50-basis-point discussion”, he said “Fortunately, SA inflation remains within the target band. I think the SARB will still move 25-basis points instead.”
The rand, meanwhile, firmed to the best level in more than three month, reaching an intraday low of R14.77/$.
At 7pm, it had strengthened 0.61% to R14.8157/$ and 0.66% to R16.3267/€, while it was little changed at R19.6439/£.
“The rand firmed as mining shares advance ... We are in this current sweet spot that inflation [globally] is benefiting metals prices and [we are] exporting more at a higher price. That’s good for the current account, which brings in more foreign currency,” said Turp.
The JSE firmed 1.21% to 75,751.41 points and the top 40 added 1.28%.
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