Bond yield surge is a dilemma for Bank

SA bond yields shot up to the highest level since the outbreak of the global financial crisis more than a decade ago, highlighting the risks faced by the Reserve Bank as it comes under pressure to cut interest rates.

The sell-off in bond markets pushed the generic 10-year yield up 73 basis points to 10.71% late on Monday, the highest since July 2008. The rand was down 1.9% at R16.5831/$, pushing its drop for the month so far to 5.4% and 15.31% for 2020.

Investors were dumping local assets even as the yield spread moved in their favour after the Federal Reserve cut US rates overnight by 50 basis points to nearly zero. The extra 10 percentage points on SA bonds isn’t proving enticing enough for foreigners, and this might make the Bank cautious in considering rate cuts that lead to more capital outflows.

The Bank, which reduced its repo rate by 25 basis points in October, starts its latest monetary policy committee meeting on Tuesday, with a decision due on Thursday. The median estimate of 21 economists in a Bloomberg survey is for the rate to drop 25 basis points to 6%. Seven economists see a 50basis-point reduction to 5.75% while two expect no change.

Despite the weakness in markets and a weak rand, which may push inflation higher, the Bank has come under pressure to support an economy that slipped into a recession in late 2019, with more weakness expected ahead as the coronavirus shuts down key areas of the economy such as aviation.

“Eighty percent of the move we have seen in the past few days has been a result of market panic and is not reflective of the true state of bonds,” said Nedbank research analyst Reezwana Sumad.

“While the fundamentals point to a loose monetary policy stance, I don’t know whether the Bank would panic into cutting by 50 or 100 basis points.”

Nedbank’s view was that the Bank would cut interest rates by 50 basis points or even more but this was a difficult call to make, Sumad said.

Finance minister Tito Mboweni gave his assurances on Monday that he was in conversation with the Bank over how to respond to the coronavirus outbreak and pleaded for an end to the pressure on governor Lesetja Kganyago to slash rates.