Fixed Income

December was characterised by central bank movement in advanced economies. The US Federal Reserve (Fed) lowered the policy rate by 25 basis points, as anticipated by the markets. The Fed emphasised that the future path of policy rates will depend on progress in addressing the persistent and elevated inflation challenges facing the economy. Financial market indicators showed some weakness toward the end of 2024, with expectations for further US interest rate cuts diminishing as a result. The European Central Bank (ECB) also reduced its policy rate. In contrast, the Bank of Japan (BoJ) and the Bank of England (BoE) left their policy rates unchanged.

The 10-year benchmark bond yields in advanced economies experienced substantial increases, with the US yield climbing 40 basis points (bps) to close at 4.57%. Inflation expectations in the US were revised notably higher due to the anticipated policies of the incoming Trump administration, leading to the removal of two previously expected 25 bps interest rate cuts from market forecasts.

Domestically, headline inflation edged up slightly, recording 2.9% year-on-year in November, compared to 2.8% in October. This result, however, surprised the market, as consensus had projected a figure above 3%. Fuel prices remain the primary driver of the lower inflation currently observed.

Core inflation, which excludes the volatile food and energy categories, moderated further to 3.7% year-on-year, well below the South African Reserve Bank’s 4.5% midpoint target. Both headline and core inflation remain low, running significantly below the midpoint of the target range.

The South African yield curve bear steepened in December, with the R2030 yield rising by 13 bps and the longer-dated R2048 bond yield increasing by 26 bps. As a result, the FTSE/JSE All Bond Index (ALBI) posted a return of -0.35% for December. The 7–12 year and 12+ year maturity buckets declined by -0.24% and -0.94%, respectively, while shorter-term buckets (1–3 year and 3–7 year) delivered modest positive returns of 0.47% and 0.2% respectively.

Inflation-linked bonds delivered positive returns for December. Yields on both the longer-dated (I2050) and shorter-dated (I2029) decreased slightly. A broad-based decline in the inflation-linked curve resulted in the FTSE/JSE Inflation-Linked Index (CILI) and the Government Inflation-Linked Bond Index (IGOV) both achieving a positive return of 0.76%.

In the money market, the 3-month Johannesburg Interbank Average Rate (JIBAR) fell by 4 bps to 7.75% in December, while the 12-month JIBAR dropped by 7 bps to 8.13%. The Alexander Forbes Short-Term Fixed Interest (STeFI) index, a common benchmark for money market funds, returned 0.69% for the month.

The Rand weakened in December, closing at USD/ZAR 18.81, as global risk appetite remained subdued. Reduced expectations for US rate cuts bolstered the US dollar, which was a key driver of the Rand's depreciation against the dollar during the month. 

Looking ahead, we remain cautious amid heightened market risk aversion. We expect central bank actions, both locally and globally, to continue to shape market conditions for the year ahead. Although further rate cuts are anticipated, we are now expecting fewer rate cuts coming from the US as inflation remains sticky. We will continue to monitor global and local political developments and inflation trends to guide our investment strategy, ensuring alignment with our long-term outlook.