The local fixed-income market’s hammering continued on Wednesday with global investors rushing to the perceived safety of gold, the dollar and US treasuries as fear of a global recession gains momentum.
Yields on SA’s 10-year bonds, which move inversely to price, rose to their highest level since April 2020, soon after the world plunged into the Covid-19 pandemic. In intraday trade, the yield on the R2030 benchmark government bond hit 10.8%.
Apart from the pandemic, the last time 10-year yields reached similar levels was when Jacob Zuma fired then finance minister Nhlanhla Nene in the middle of the night on December 9 2015.
In recent weeks there was mounting fear that in an attempt to tame multi-decade high inflation, major global central banks will continue to hike interest rates aggressively. Concern among market participants is that this will probably push rates to levels that could force economies into recession, which has in the past led to a steep increase in volatility and risk aversion.
“It’s not a great day for bonds in SA and other emerging markets. The market seems to be pricing in much higher interest rates in SA,” said Absa head of fixed income James Turp. “It’s a temporary situation, however, but things are not looking good in the short term. In the longer term, however, bonds still remain attractive.
“The question remains around the growth of the economy; how high rates can actually go, and how much higher rates can really influence our sources of inflation here in SA, which are mainly administered prices and imported oil prices,” said Turp.
In this environment the dollar is strengthening as the prospects of further US rate hikes attract capital back to the world’s biggest economy.
Against that global backdrop, analysts continue to be bearish on the rand, which is also being undermined by domestic factors such as Eskom’s rolling blackouts. The rand was hovering around its weakest level since October 2020.
“Concern over the building risk of a global recession has driven the risk-off mood as high inflation and resultant high interest rates, along with weakening industrial activity due to high energy costs, worry investors,” Investec chief economist Annabel Bishop wrote in a client note.
“SA’s economy will not escape a global recession, and indeed is already at high risk of one from the severe level of load-shedding.
“A global recession on top of this along with an extremely hawkish approach of central banks have eroded the potential economic growth benefits for SA this year. The Reserve Bank’s next monetary policy committee (MPC) meeting is just a couple of weeks away, and a volatile or sharply lower currency may complicate policymaking as food and oil prices push higher even as economic activity slows.”
The Bank raised the repo rate by 50 basis points (bps) at its last meeting in May. Speculation is mounting over whether a similar increase is likely or whether the MPC will raise rates by 75 bps when it meets on July 21.
The weaker rand could worsen exogenous inflation pressures, prompting the Bank to turn even more aggressive, said Matrix Fund Managers economist and macro strategist Carmen Nel. “This is despite the still fragile domestic economy, with the KwaZulu-Natal floods and recent load-shedding being negative for sequential growth.
“While the base case is that the MPC will hike the repo rate by 50 bps at the July meeting, ongoing rand weakness could prompt a more aggressive 75 bps increase,” said Nel. “To be sure, the Bank will have the June CPI data in hand, which should show inflation breaching 7% quite comfortably due to higher fuel and food prices.”
By 5.20pm the yield on the benchmark R2030 bond had increased 9 bps, to 8.71%. While that is way off the Covid-19 crisis-induced levels of 2020, yields have increased in six of the past 10 days, reflecting growing risk aversion. However, they are still relatively attractive compared with the 2.8% on offer for holding US treasuries.
The rand was last seen 1.8% weaker at R16.82/$. It has weakened more than 5% to the greenback so far this year.
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