SA yields spike in ’global sell-off
SAs benchmark bond yields rose to a four-month high as concerns about US inflation sparked a global bond sell-off and curbed investor demand for higher-yielding assets. The yield on the R2030 bond jumped 13 basis points to 9.13% on Friday.
SA’s benchmark bond yields rose to a four-month high as concerns about US inflation sparked a global bond sell-off that spilt over into equity markets and curbed investor demand for higher yielding assets.
The yield on the R2030 bond jumped 13 basis points to 9.13% on Friday, the highest since early November, as rising US treasury yields signalled that the market was pricing in faster growth and inflation in the world’s biggest economy. Bond yields move inversely to prices.
The scurry out of bonds pushed the rand weaker, with it falling to R15.19/$. It breached R15/$ for the first time in just over two weeks on Thursday.
The spike in SA bond yields came just days after finance minister Tito Mboweni delivered his annual budget, in which he announced a better-thanexpected debt trajectory, which is now forecast to peak at 88.9% of GDP in 2025/2026 instead of the 95% announced in 2020.
Though analysts said the selloff in government debt was linked to global factors and not to domestic fiscal constraints, Moody’s Investors Service announced that it still expects SA’s fiscal debt burden to reach 100% of GDP by 2024.
“The budget turned out to be a lot better than expected and local bonds rallied immediately afterwards so this sell-off is not linked to the budget in my view,” said Victor Mphaphuli, head of fixed income at Stanlib.
“But all the benefits of the budget were eroded due to the reflation trade (or a bet extraordinary fiscal stimulus will drive up inflation) that has seen treasury yields spiking. Inflation is being priced into treasuries, and since they are the benchmark security against which everything else is priced, it’s impacting riskier assets.”
Benchmark 10-year US treasury yields rose above 1.6%, the highest in more than a year, after an auction of seven-year US debt experienced lower-thananticipated demand, which saw the bid-to-cover ratio come in at 2.04 vs a recent average of 2.35. Bid-to-cover ratios measure demand relative to supply of the securities, so the below-average reading indicated investors are demanding higher yields to hold the securities.
That resulted in a dramatic sell-off in bond markets around the world that also hurt equities and emerging market currencies amid increasing speculation the US Fed might begin hiking US interest rates sooner than previously expected.
Bloomberg reported on Friday that markets now see a Fed hike by March 2023 versus previous predictions for hikes to begin in the middle of that year.
“US President Joe Biden’s administration wants to push through another $1.9-trillion in stimulus, and if that happens you’re going to have people receiving cheques at the same time they’re being vaccinated,” said Mphaphuli. “That’s likely to see greater movement and consumption, which could be inflationary. If US inflation proves to be more than transitory and continues over the longer term, then it will impact emerging market assets negatively.”
The mix of positive news from SA’s budget against a negative global backdrop was reflected in the rand, which though only a little stronger against the dollar on Friday was still the best-performing emerging market currency against the greenback. The Indian rupee, South Korean won and Indonesian rupiah all weakened more than 1%, leading declines against the dollar.
The JSE all share index snapped two days of gains, retreating from a near record high of almost 68,000 points. By the close on Friday, it had fallen 2% to 66,138 points.