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Strong bond market rebound: Buy in May and go away?

31 May 2020

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

Economic & bond market review

High yields lure buyers back despite persistent negative news flow

In our March market commentary, we argued that the sharp intra-month rise in market yields had gone too far.  Although the investment theme deteriorated in a significant way, it appeared that the market, at that point, had discounted a lot of the negative news flow.  This view turned out to be correct, not just for April, but also for the month of May.  During May, the majority of the RSA Government nominal fixed-rate and inflation-linked bonds ended the month at lower yields.  In the nominal bond market, and in contrast to April when short-dated bond yields declined sharply and led to bullish yield curve steepening, the decline in yields was more evenly spread across the curve during May.  In fact, yields at the short end of the yield curve pulled back from their intra-month low levels in response to a smaller than expected repo rate reduction of 50 basis points (bps) by the South African Reserve Bank (SARB).  More specifically, nominal fixed rate bonds in the 7 to 12-year maturity band of the All Bond Index (ALBI) rendered a total return of 13.04%.  This was well above the total ALBI return of 9.56% and a long way away from cash and inflation-linked bonds. 

Figure 1: South African nominal bond yield curve changes
South African nominal bond yield curve changes
Source: Bloomberg, Futuregrowth

Inflation-linked bonds remain the laggard

The yields of both short and longer-dated inflation-linked bonds ended the month higher, while yields in the belly ended the month at lower real yields.  Although the returns offered by this asset class were significantly lower than those of nominal bonds, the 1.7% total return of the JSE Inflation-linked Government Index (IGOV) was superior to the cash return of +0.4%.  The significantly weaker performance of inflation-linked bonds relative to nominal bonds continues to mirror expectations of a significant downside risk to inflation in the short term.  For better context, it is worthwhile looking at performance over a longer period (Table 1).  Despite significant market volatility over this period, nominal bonds in the 3 to 7-year maturity band offered the best returns, while inflation-linked bonds lagged in a very significant way. 

Table 1: Index returns for periods ending 31 May


Return (1M)

Return (3M)

Return (YTD)

Return (1Y)

Modified duration


ALBI 1-3







ALBI 3-7







ALBI 7-12







ALBI 12+



























The collapse in economic activity resulted in a significant decrease in tax revenue collection

Budget data for April, the first month of the fiscal year 2020/21, showed a 9.1% year-on-year collapse in gross tax revenue collection as the COVID-19 induced lockdown decimated economic activity and income.  Although a slump of 16.8% in government expenditure mitigated the effect, this was merely a timing mismatch as April’s social grants were paid in March.  The outlook for the fiscal situation remains daunting at best.

External merchandise trade account data release delivers a negative surprise

Following three months of exceptionally strong trade surpluses and, in the process, raising hopes of a much smaller current account deficit, the hard lockdown negatively impacted exports in April.  The swing from a revised March surplus of R23.4 billion to the deficit of R35 billion in April is significant and demonstrates the severity of the lockdown impact.   

Net foreign selling loses some momentum post the WGBI exclusion

The Moody’s rating action forced the country’s exclusion from the World Government Bond Index (WGBI) at the end of April, which in turn forced the selling of rand-denominated RSA government bonds by WGBI tracking passive managers.  As could be expected, much of this well-telegraphed event had been anticipated by active managers.  This is demonstrated by the net selling by foreign investors, which totalled around R68 billion for the first four months of the year, with about R16 billion recorded in April.  During May, net foreign selling continued, but at a slower pace.  As a result, the share of foreign investor holdings of RSA rand denominated government bonds has decreased to 31.5%, the lowest level in 8 years.  This is already well below the peak of 42% recorded almost two years ago and is now similar to the percentage held prior to SA’s inclusion in this and other indices in 2012. 

Figure 2: Foreign ownership of RSA Government bonds (percentage of nominal and inflation-linked bonds)
Foreign ownership of RSA Government bonds (percentage of nominal and inflation-linked bonds)
Source: JSE, Futuregrowth

Inflation remains one of a limited number of small green flags

Even though Stats SA was forced to postpone the April inflation data release due to the inability to run its normal survey process during lockdown, anecdotal evidence suggests that relative price stability remains the story of the hour.  The latest available Consumer Price Index (CPI) data confirms a very muted underlying inflation picture with no evidence of pass through from a significantly weaker rand, admittedly at this very early stage.  In March, a slower than expected rate of increase of 4.1%, mainly due to lower education and health inflation, compares well to the 4.6% recorded in February.  This remains one of a few developments allowing the SARB to ease monetary policy in an effort to contain some of the economic fallout.


During May the market continued to regain some of the COVID-19 induced losses.  Low inflation and a collapse in economic activity enabled the central bank to reduce the repo rate by an additional 50bps to 3.75%, the lowest since the introduction of the repo rate in 1998.  In contrast to April, yield across the yield curve declined to lower levels, although the extent of the rally in long-dated bonds was relatively muted due to the daunting fiscal situation. 

Key economic indicators and forecasts (annual averages)


    2016 2017 2018 2019 2020 2021
Gobal GDP   2.5% 3.4% 3.3% 2.6% -4.1% 5.3%
SA GDP   0.4% 1.4% 0.8% 0.4% -706% 5.2%
SA Headline CPI   6.3% 5.3% 4.6% 4.1% 2.9% 3.9%
SA Current Account (% of GDP)   -2.9% -2.5% -3.5% -3.2% 1.5% -1%

Source: Old Mutual Investment Group