Fixed Income Review
October was marked by a "risk-off" sentiment driven by uncertainty surrounding the U.S. elections on 5 November. A major concern was the potential impact on emerging markets, as a Donald Trump presidency is expected to impose significant tariffs on imports to the US, which could weaken the South African Rand and other emerging market currencies.
The 10-year benchmark yields across advanced economies saw significant increases, with the US yield rising by 50 basis points (bps) to a final reading of 4.29%. The Personal Consumption Expenditures (PCE) Index recorded an increase of 2.1% year-on-year in September, down from 2.3% in August. Core PCE, which is the Fed's preferred inflation gauge, was unchanged at 2.7% year-on-year, though slightly above market consensus of 2.6%.
Locally, headline inflation continued to decline, printing at 3.8% year-on-year in September, down from 4.4% in August. This decrease was primarily due to lower fuel prices. Core inflation, which excludes food and energy prices, held steady at 4.1% year-on-year. Both headline and core inflation remain below the South African Reserve Bank’s midpoint target of 4.5%, supporting the case for another interest rate cut at the upcoming Monetary Policy Committee (MPC) meeting in November.
Yields rose significantly in the South African bond market, with the R2030 yield increasing by 44 bps, while the longer-dated R2048 bond yield rose by 58 bps. Consequently, the FTSE/JSE All Bond Index (ALBI) returned -2.20% for October. Within the ALBI, the 7-12 year and 12+ year maturity buckets recorded declines of -2.13% and -3.42%, respectively. The shorter-term 1-3 year and 3–7-year buckets experienced smaller losses of -0.06% and -1.21%, respectively.
Inflation-linked bonds were also in negative territory during October. The front end of the yield curve saw the I2025 bond yield rise by 83 bps, while the longer-dated I2050 bond yield increased by 18 bps. As a result, the FTSE/JSE Inflation-Linked Index (CILI) returned -1.03%, and the Government Inflation-Linked Bond Index (IGOV) returned -1.07% for the month.
In the money market, the 3-month Johannesburg Interbank Average Rate (JIBAR) declined by 3 bps to 8.02% in October, while the 12-month JIBAR fell by 15 bps to close at 8.38%. The Alexander Forbes Short Term Fixed Interest (STeFI) index, commonly used as a benchmark for money market funds, returned 0.68% for the month.
The Rand weakened in October as global risk appetite remained subdued. Contributing concerns included the upcoming U.S. elections, the Federal Reserve’s cautious stance on further rate cuts, and the Medium-Term Budget Policy Statement (MTBPS). While the Rand briefly reacted to the MTBPS announcement, it quickly stabilised. The local currency ended October weaker, however, closing at USD/ZAR 17.75 compared to USD/ZAR 17.11 (SARB) at the end of September, as other risk events loomed.
Looking ahead, we remain cautious amid heightened market risk aversion. We expect central bank actions, both locally and globally, to shape market conditions for the rest of this year and into the next. Although further rate cuts are anticipated, the pace may slow if inflationary pressures emerge from the US political landscape. 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.