Cadiz Asset Management MD and CIO, Sidney McKinnon, on how the near-term outlook will be increasingly shaped by external factors.
Fixed Income
Geopolitical risks eased during the month following a provisional agreement reached between the United States and Iran on 28 May to extend the ceasefire for 60 days and support ongoing negotiations concerning Iran’s nuclear programme. Although the memorandum of understanding awaits final approval from President Trump, the development was interpreted positively by markets. US equities subsequently rallied to record levels, with technology shares leading the advance.
On the other hand, the U.S. bond market faced headwinds during May as Treasury yields moved higher amid persistent inflation concerns, elevated energy prices and ongoing geopolitical uncertainty. Longer-dated Treasury securities were particularly affected, with the 30-year yield briefly surpassing 5% for the first time since 2007. Despite the pressure on government bonds, credit markets remained well supported by strong investor demand, allowing broader fixed-income indices to deliver modest positive returns for the month.
European bonds posted positive returns late in the month as rate pressures cooled, while U.S. 10-year Treasury yields remained sticky, ending the month and entering early June near the 4.53%–4.57% range.
U.S. inflation picked up in April, with headline CPI rising to 3.8% y/y from 3.3% in March and core CPI increasing to 2.8% from 2.6%. A similar pattern was observed in the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, where headline PCE accelerated to 3.8% y/y from 3.5%, while core PCE edged up to 3.3% from 3.2%. Although these readings were broadly in line with market expectations, they highlight the persistence of underlying inflationary pressures and remain well above the Federal Reserve’s 2% inflation target.
South Africa’s inflation rate also picked up in April, with headline CPI rising to 4.0% y/y from 3.1% in March, while core CPI increased to 3.6% y/y from 3.2%. The acceleration was mainly driven by higher international oil prices and a weaker rand, which pushed up transport costs and contributed to broader price pressures across the economy.
The South African Reserve Bank’s Monetary Policy Committee (MPC) raised the repo rate by 25 basis points, from 6.75% to 7.00%, citing heightened upside inflation risks stemming from geopolitical tensions in the Middle East, which have driven global oil prices higher and contributed to some depreciation in the rand. The decision was supported by four of the six committee members.
The local government bond yield curve bull-steepened in May, with the short-dated R2030 yield declining by 38bps and the long-dated R2048 declining by 31bps. As a result, the FTSE/JSE All Bond Index (ALBI) delivered a total return of 2.86% for the month, with the 12+ year and 7–12-year segments contributing most to the positive performance.
On the money market front, markets continued to price out rate cut probabilities and price in potential rate hikes. The 3-month JIBAR rose by 20bps to 6.98%, while the 12-month JIBAR declined marginally by 7bps to 7.73%. Treasury bill rates also edged higher, particularly in the 3-month area, rising by more than 20bps over the period. The Alexander Forbes Short-Term Fixed Interest (STeFI) Composite Index delivered a return of 0.53% for the month.
The South African Rand remained volatile but strengthened against the US dollar the euro and to a lesser extent the pound, toward the end of the month. This pull back was largely on the back of progress being made in the Middle East peace talks. The currency was further supported when Standard and Poor’s affirmed the positive outlook on South Africa’s credit rating.
Looking ahead, global risk sentiment is likely to remain dominated by oil price volatility and uncertainty related to the ongoing Middle East conflict. Rising energy prices are reinforcing inflation concerns and keeping bond market volatility elevated. Despite these headwinds, domestic fixed income remains well supported by strong carry, improving liquidity conditions and attractive real yields. The near-term outlook will be increasingly shaped by external factors, however, with energy markets and US rate expectations likely to be the key drivers of performance.
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