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Bond market bulls were swept aside by an avalanche of sentiment-busting events

30 Sep 2021

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

Economic & bond market review

Global risk aversion took centre stage

Investor sentiment was impacted by several developments during the past quarter, resulting in a strong negative response across most markets. Globally, one of the main catalysts of risk aversion was the resurgence of COVID-19 infections earlier in the quarter, even amongst nations with a high vaccination rate, which cast doubt on the economic recovery. Concerns about slowing Chinese economic growth, and panic about possible contagion risk linked to the Evergrande real estate saga, contributed to the reaction. The loss of global growth momentum and a number of negative developments in China forced elevated non-energy commodity price levels sharply downwards. In stark contrast, crude oil prices spiked, reflecting concerns about supply/demand imbalances. Elsewhere, global supply bottlenecks and transport disruptions persisted, which, in turn, continued to boost input costs, thereby feeding inflation concerns. The US debt ceiling circus also contributed to market jitters.     

Figure 1: South African terms of trade rolling over following recent commodity developments

Source: Bloomberg, Futuregrowth

Global monetary policy continued its gradual shift onto a more hawkish path

Despite the haze caused by the developments mentioned above, the latest round of central bank meetings across the global made it abundantly clear that the broader trend for policy had shifted in the direction of tightening. This was mainly in response to rising concerns that elevated inflation may persist for longer than initially expected. In fact, a growing number of emerging market central banks lead the way in this regard, as higher inflation (in some cases in hyper territory) forced policy tightening. The Norwegian central bank was the first of the advanced economy central banks to pull the trigger on its policy rate. In the case of the biggest global economy, the US Federal Reserve revealed that it may indeed commence with the gradual tapering of its asset purchase programme by year end, but with rate increases to follow much later. This is thanks to stronger economic growth, the gradual labour market recovery and rising inflation. While this had been well telegraphed by the US central bank and thus should have been anticipated in advance, US treasury yields nonetheless drifted higher in direct response to the latest announcement, causing most global bond markets to follow suit.

The South African Reserve Bank opts not to play “follow the leader” – for now

While the members of the Monetary Policy Committee of the South African Reserve Bank (SARB) unanimously voted in favour of no rate action at the September meeting, it remains clear that the next change to the repo rate will be upwards, possibly sometime during the first quarter of next year. In the short term, the combination of a fragile economic recovery in the outer years, a relatively benign inflation outlook, and a stronger balance of payment position allows for some breathing room relative to its more hawkish peer group. In contrast, the Forward Rate Agreement market continues to reflect more bearish expectations of an earlier start and a steep rise in the repo rate over the next 21 months. We remain less convinced of such an aggressive path with respect to local monetary policy adjustment, for similar reasons highlighted by the SARB.

Figure 2: Central bank policy rate changes versus inflation

Source: Bloomberg, Futuregrowth

Recent commodity market gyrations are of particular concern to South Africa

The recent sharp weakening in the country’s terms of trade as a result of commodity market gyrations is particularly concerning. Not only did commodity weakness, along with a stronger US Dollar, contribute to significant rand depreciation, it also has negative consequences for general economic activity and the fiscal position, both of which remain particularly fragile. In the absence of a non-energy commodity price recovery, which seems unlikely at this stage, the extent of the upside surprise to company tax revenue receipts in the first three months of the 2021/22 fiscal year will not be repeated. It follows that, unless current government expenditure is reduced, the outlook for faster fiscal consolidation has once again become murkier.   

Figure 3: Earlier boost to company tax revenue at risk in light of recent commodity gyrations

Source: Bloomberg, Futuregrowth

National account rebasing impacted key metrics positively - but be aware of becoming tricked 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. 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 cosmetic 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, become more inclusive, generate a more broad-based tax revenue stream and 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. This helped to lift investor sentiment somewhat but may not be a sustainable supportive factor.

Figure 4: Impact of revised GDP estimate on fiscal metrics

Source: National Treasury, Bloomberg, Futuregrowth

South Africa’s main budget balance is still on track to show an improvement relative to official estimates

Despite significant monthly swings in the main budget balance (partly the result of normal seasonal factors but also supported by higher commodity prices that fed through via higher company tax receipts) data for the first five months of the current fiscal year point to a smaller deficit compared to forecasts at the time of the tabling of the budget in February. The cumulative budget deficit for this period is around 40% smaller than the R324 billion deficit for the same period last year, and about R100 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, even though we have taken care to temper our enthusiasm in light of recent negative commodity market developments and ongoing expenditure demands on National Treasury.

Inflation is stabilising at slightly lower levels – and well within target

Locally, the August Headline Consumer Price Index (CPI) recorded a year-on-year increase of 4.9%, a touch higher than the 4.6% than the previous month, but still off the cycle peak of 5.2% in May. Core CPI increased to 3.1% (compared to 3.0% in July), 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 rose from a year-on-year increase of 7.1% in July to 7.2% in August. This is still well below the 7.7% recorded in June. While the latest increase was mainly the result of higher fuel and transport equipment, inflation appears to be stabilising or easing in many of the other categories.

The local bond market was hurt by the most recent bout of risk aversion

The developments described above served as catalysts for bearish yield curve steepening, as the yields of long-dated bonds increased by more than those of shorter-dated bonds. As a result, bonds in the 12+ year maturity band of the FTSE JSE All Bond Index (ALBI) only managed to return -0.01% for the quarter, well below the 1.52% offered by bonds in the 1- to 3-year maturity band. At total index level, the ALBI managed to eke out 0.37%, well below that of the 0.87% offered by cash. In contrast to nominal bonds, inflation-linked bond yields 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 2.0% for the quarter ending September. This asset class also managed to retain its first position for the first nine months of this year, with the IGOV returning 9.91% compared to 5.38% and 2.61% for the ALBI and cash, respectively.

Figure 5: Bond market index returns (periods ending 30 September 2021)

Source: JSE, Futuregrowth


Risk appetite was negatively impacted by a number of global and local developments during the quarter. Of most direct significance was the upward pressure on global bond yields as central banks increasingly became more hawkish, while commodity market gyrations and a stronger US Dollar contributed to significant rand weakness towards the end of the quarter. The national account rebasing (which revealed a bigger than previously estimated South African economy) on key economic and particularly fiscal metrics, and an ease in local inflationary pressure, was overshadowed by negative offshore developments, impacting risk appetite negatively. As a result, nominal bond yields drifted higher, with long-dated bonds taking the brunt of the upward correction as the yield curve bear steepened. Against this backdrop, inflation-linked bonds proved more resilient and, as a result, managed to render a return superior to that offered by nominal fixed rate bonds and cash. 

Key economic indicators and forecasts (annual averages)


    2017 2018 2019 2020 2021 2022
Gobal GDP   3.4% 3.3% 2.6% -3.6% 6.0% 4.4%
SA GDP   1.0% 1.5% 0.1% -6.4% 5.6% 2.3%
SA Headline CPI   5.3% 4.6% 4.1% 3.3% 4.4% 4.5%
SA Current Account (% of GDP)   -2.5% -3.5% -3.2% 2.2% 4.5% 0.5%

Source: Old Mutual Investment Group