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A strong month for bonds despite significant risk appetite gyrations

31 Aug 2021

Wikus Furstenberg, Refilwe Rakale, Yunus January, Daphne Botha, Aidan Kilian / Interest Rate Team

Economic & bond market review

August was characterised by large sentiment swings

The resurgence of COVID-19 infections, even amongst nations with a high vaccination rate, and renewed whispers of Federal Reserve tapering served as the main catalysts for the bout of risk aversion earlier in August. This impacted markets globally. In the case of South Africa, the impact of MSI equity index re-balancing, together with US-dollar strength and downward pressure on commodity prices, caused the rand to initially depreciate to a five-month low and bond yields to drift higher. However, as fresh negative news flow dried up and market participants realised that talk of gradual US monetary policy reversal is not supposed to be news (especially following mostly neutral comments by the Federal Reserve Chairman) risk appetite recovered somewhat. Mr Powell expressed the expectation that while the Federal Reserve is likely to start reducing the pace of its bond buying programme before the end of this year, there is no need to raise the policy rate yet. This message contains absolutely nothing new.        

National account rebasing impacted key metrics positively - but be aware of getting trapped by optics

In August, Statistics South Africa released its rebased and reweighted gross domestic product (GDP) estimates. This is a regular statistical exercise guided by international best practices. The last update occurred in 2014. The latest revision resulted in an 11% increase in the size of the economy in 2020, now estimated at R552 billion. Upward revisions to economic activity in the informal sector and so-called illegal activities contributed significantly to the GDP adjustment. Notably, changes to the composition of the supply and demand components of GDP revealed that more than 60% is attributed to household consumption, while fixed investment spending declined from an already low 16% to less than 14%.

However, it is critical to note that the growth rate of the economy has not changed materially over time. In fact, it remains dismal. While the upward adjustment to the GDP base allows for some “improvement” to key macroeconomic metrics such as the public sectors’ deficit (from the budgeted -6.3% to -5.8% by 2023/24) and debt to GDP (from the budgeted 87.3% to 79.9% by 2023/24) ratios in light of the application of a larger denominator, these are mere optics. The focus should remain on fundamental drivers such as fixed investment spending and the economic growth rate which continue to show protracted decay. From a fiscal perspective, the ability of the economy to grow faster, to become more inclusive, generate a more broad-based tax revenue stream and to enable the better management of the growing public sector debt burden has not changed. The release of the second quarter 2021 Labour Force Survey results served to emphasise the worsening unemployment crisis in our country.

Even so, the improvement of key fiscal metrics does feed into a marginally reduced probability of near-term sovereign credit rating downgrades. In turn, this helped to lift investor sentiment even though it may not be a sustainable supportive factor.

Figure 1: Impact of revised GDP estimate on fiscal metrics

Source: Stats SA, Futuregrowth

South Africa’s main budget balance swung to a large deficit on the back of seasonal drivers

In stark contrast to June’s surplus of R63 billion, the main budget balance swung to a deficit of R133 billion in July. A large monthly deficit was in the offing mainly due to two seasonal factors. Firstly, seasonally large provisional corporate tax receipts in June typically dropped to a mere trickle in July. On the expenditure side, large scheduled coupon payments in July resulted in a significant spike, causing a large seasonal monthly cash flow mismatch. None of this changed the bigger picture, as the cumulative budget deficit for the first four months of the current fiscal year is still around 40% smaller than the R260 billion deficit for the same period last year, and about R90 billion ahead of National Treasury’s schedule. Therefore, our view of a lower budget deficit for FY21/22 relative to National Treasury’s February estimate, remains unchanged.  

Inflation pressure continued its recent downward trend

Locally, the July Headline Consumer Price Index (CPI) recorded a year-on-year increase of 4.6%, a touch lower than the previous month and some way off the cycle peak of 5.2% in May. Core CPI slowed to 3.0% (compared to 3.2% in June), still clearly pointing to subdued underlying price pressures. Inflationary pressure also started slowing at the producer level. The Producer Price Inflation Index (PPI) for final manufactured goods declined from a year-on-year increase of 7.7% in June to 7.1% in July. Notably, this deceleration in the rate of increase reflects the dissipation of adverse base effects in the coke, petroleum and chemicals category. As to be expected, the market reaction to the latest inflation data was muted, since it was in line with consensus, with no significant immediate impact on the expected monetary policy path.

The local bond market regained lost ground to end the month on a strong footing

The positive developments toward month end brought improved investment sentiment, which allowed nominal bonds to recover lost ground and once again render decent monthly returns. More specifically, bonds in the 12+ year maturity band of the FTSE JSE All Bond Index (ALBI) rendered a spectacular return of 2.46% following bullish yield curve flattening. This contributed to an overall ALBI return of 1.70%, well above the 0.29% offered by cash. Inflation-linked bond yields also edged lower while investors continued to benefit from a reasonable inflation carry. As a result, the FTSE JSE Government Inflation-linked Index (IGOV) rendered a decent return of 1.21%.

Figure 2: Bond market index returns (periods ending 31 August 2021)

Source: JSE, Futuregrowth


Risk appetite was initially negatively impacted by renewed concern about the impact of the Delta variant on global growth prospects, as well as renewed concerns about Federal Reserve tapering. As a result, the rand lost ground in response to a stronger US Dollar and lower commodity prices. In turn, this caused local bond yields to rise. However, an improvement in sentiment as negative news flow dried up allowed the bond market to regain lost ground towards month end. The positive impact of the national account rebasing (which revealed a bigger than previously estimated South African economy) on key economic metrics, as well as confirmation of the downtrend in local inflation, contributed to improved investor sentiment and renewed buying interest. As a result, both the nominal and inflation-linked bond indices managed to render decent returns well above those of cash.

Key economic indicators and forecasts (annual averages)


    2017 2018 2019 2020 2021 2022
Gobal GDP   3.4% 3.3% 2.6% -3.6% 6.5% 4.4%
SA GDP   1.0% 1.5% 0.1% -6.4% 4.9% 2.3%
SA Headline CPI   5.3% 4.6% 4.1% 3.3% 4.2% 4.5%
SA Current Account (% of GDP)   -2.5% -3.5% -3.2% 2.2% 3.0% -0.5%

Source: Old Mutual Investment Group