Fixed Income 

The US Federal Reserve (Fed) took a cautious approach to their monetary policy. The decision to hold rates steady aligns with the view that they want to assess more data, particularly around jobs and inflation, before making any further rate adjustments. This suggests they're still focused on ensuring inflation is under control without risking a significant slowdown in the economy.

In contrast, the ECB's decision to cut rates by 25 basis points reflects a more proactive response to weaker economic conditions in the eurozone. It indicates that they are focused on providing economic support through easier monetary policy, and the expectation of further rate cuts signals that the ECB is responding to slower growth with an eye on reaching its neutral rate. This divergence in approach reflects the differing economic environments and priorities of the two regions. While the US is likely focusing on inflation control and economic resilience, the ECB appears more focused on stimulating growth due to current economic softness.

The yield on the US 10-year Treasury dipped slightly to 4.54%, down by 3 basis points from the previous month. In contrast, Germany’s 10-year yield rose by 9 basis points to 2.46%, while the UK’s yield remained unchanged at 4.54%. 

In South Africa, the Reserve Bank's Monetary Policy Committee (MPC) opted to reduce the repo rate by 25 basis points during its January meeting. As expected, the MPC maintained a hawkish stance, highlighting several risks that could affect its inflation outlook. Despite this cautious tone, the likelihood remains that there will be two more rate cuts in the first half of the year.

Both headline and core CPI readings in December printed below the 4.5% midpoint of the inflation target range. In December, headline CPI recorded a reading of 3.0% YoY. Core inflation cooled to a reading of 3.6% YoY, which was 0.1 percentage point lower than the previous month. Overall, for 2024, inflation averaged 4.4%.

In January, the yield on South Africa’s shorter dated R2030 government bond was flat and the longer dated R2048 rose by 12 basis points. The FTSE/JSE All Bond Index (ALBI) posted a positive return of 0.44%, however, with the gains largely driven by the shorter end of the yield curve. 

Inflation-linked bonds experienced some declines in January. The yield on the shorter dated I2029 rose by 5 basis points, while the yield on the long-dated I2050 inflation-linked bond increased by 9 basis points. Meanwhile, the FTSE/JSE Inflation-Linked Index (CILI) and the Government Inflation-Linked Bond Index (IGOV) posted negative returns of -0.32% and -0.35%, respectively.

In the money market, the 3-month Johannesburg Interbank Average Rate (JIBAR) fell by 19.2 bps to 7.558% in January, while the 12-month JIBAR dropped by 8 bps to 8.117%. The Alexander Forbes Short-Term Fixed Interest (STeFI) index, a common benchmark for money market funds, returned 0.66% for the month.

The Rand strengthened in January, closing at USD/ZAR 18.67. After initial weakness, the currency regained some positive momentum seeing gains against the US dollar, British Pound and the Euro. This can largely be attributed to the reduction in the risk-off trade post the Trump presidential inauguration.

Looking ahead, we retain a cautious stance as we enter a period of global market uncertainty. We continue to monitor global interest rate policies and inflationary measures and the impact it may have on our local markets. We do anticipate further rate cuts locally as inflation is expected to remain muted in the short term. Details of our fiscal trajectory will become clearer when the national budget is delivered on 19 February. For now, most of the risk to bond market volatility lies with global market volatility. We continue to employ a holistic approach to our investment process and remain guided by the many factors that influence the directional movement of interest rates.