Fixed Income

The US-Iran conflict shifted from open hostilities toward a fragile ceasefire process, with the Islamabad Memorandum of Understanding, signed on 17 June 2026, establishing a 60-day framework for negotiating a broader agreement covering sanctions, nuclear issues, and regional security. While the move toward a negotiated stand-down provided some relief, significant uncertainties remained, particularly around the future administration and security of the Strait of Hormuz, which continued to pose risks to regional stability and global energy markets.

Oil prices reflected this improvement in sentiment. After trading above USD100 per barrel and briefly testing levels near USD120 earlier in the crisis on fears of supply disruptions, Brent crude retraced sharply through May and June as the ceasefire took hold and shipping through the Strait of Hormuz recovered. By late June, Brent had fallen to the mid - USD70s per barrel, approximately 25% below its peak.

Major central banks maintained a hawkish bias during the month. The European Central Bank (ECB) and the Bank of Japan (BoJ) raised interest rates, reflecting continued concerns around inflationary pressures and resilient economic activity. Meanwhile, the US Federal Reserve (Fed) and the Bank of England (BoE) left policy rates unchanged but reiterated their commitment to returning inflation to target levels. Policymakers broadly agreed that inflation risks remained elevated and that there was limited scope for near-term policy easing, reinforcing the view that monetary policy is likely to remain restrictive for longer.

Locally, headline CPI accelerated to 4.5% y/y in May, up from 4.0% y/y in the previous month. While this represented a significant increase, the outcome was still below the consensus expectation of 4.7% y/y. Fuel prices remained the primary driver of inflation, rising 14.3% m/m and 28.7% y/y. In contrast, food inflation moderated to 1.9% y/y, from 3.0% y/y in the previous month, partially offsetting the impact of higher fuel costs. Second-round effects from higher fuel prices continued to filter through to underlying inflation, with core CPI accelerating to 3.8% y/y from 3.6% y/y previously.

Global sovereign bond markets delivered mixed returns in June. The US 10-year Treasury yield increased by 3bps, while the Japanese 10-year government bond yield was broadly unchanged, rising by just 1bp over the month. French 10-year government bond yields increased by 10bps, while UK, South African and German 10-year government bond yields declined by 6bps, 13bps, and 8bps respectively. The decline in South African bond yields extended the local market's recovery and reflected improving investor sentiment.

The local yield curve flattened further in June, with the short-dated R2030 yield declining by 7bps and the long-dated R2048 yield falling by 12bps. The larger decline in longer-dated yields reflected improving investor sentiment and continued demand for duration, despite the uptick in inflation. As a result, the FTSE/JSE All Bond Index (ALBI) delivered a total return of 1.55% for the month, bringing its year-to-date return to 4.25%.

On the money market front, movements were muted during June. The 3-month JIBAR increased by just 1bp to 6.99%, while The South African Rand Overnight Index Average (ZARONIA) rose by 8bps over the month. In contrast, Treasury bill yields declined modestly, with the 6-month T-bill falling by 2bps and the 12-month T-bill declining by 5bps. The divergence between JIBAR, ZARONIA, and Treasury bill movements reflects ongoing adjustments in short-term funding markets as the transition from JIBAR to ZARONIA continues.

The South African rand remained volatile and weakened against the US dollar in June, closing the month at R16.39/USD, compared to R16.23/USD at the end of May. The depreciation was driven primarily by broad US dollar strength rather than domestic weakness, as investors sought safe-haven assets amid heightened geopolitical uncertainty. The rand proved resilient despite the volatility in global financial markets stemming from the Middle East conflict.

Looking ahead, the global backdrop remains uncertain. Although the US-Iran ceasefire has eased immediate supply disruption concerns and allowed oil prices to retrace from their highs, unresolved questions around the future control and security of the Strait of Hormuz continue to pose risks to global energy markets. At the same time, major central banks remain cautious, with policymakers emphasising elevated inflation risks and limited scope for near-term monetary easing.

Against this backdrop, domestic fixed income remains well supported by attractive real yields, improving investor sentiment and favourable valuations relative to global peers. The decline in South African bond yields during June, combined with resilient demand for local assets, highlights the market's ability to withstand periods of external volatility. The outlook remains closely tied to global developments, however, particularly the trajectory of oil prices, the inflation outlook and the path of US interest rates, which are likely to remain key drivers of risk sentiment and bond market performance in the months ahead.