On 16 September the US Federal Reserve (Fed) lifted its policy rate by 25 basis points (bp), its first increase since 2023 and a move broadly anticipated by markets. The unanimous decision was driven by inflation remaining persistently high. Its revised dot plot continued to signal a hawkish stance, with 16 of 18 FOMC members expecting a further rate increase in 2026.

In Europe, the European Central Bank (ECB) likewise raised rates by 25bp, pointing to mounting inflation pressures associated with developments in the Middle East. It also revised upward its inflation forecasts for 2027 and 2028 and its growth outlook for 2026 and 2027. By contrast, the Bank of England (BoE) kept rates unchanged at 3.75% in a 6–3 vote. While the Monetary Policy Committee (MPC) found limited evidence of second-round price effects and acknowledged somewhat stronger-than-expected growth, it continued to view inflation risks as tilted to the upside.

In Asia, the Bank of Japan (BoJ) delivered a widely expected 25bp rate increase against a backdrop of yen weakness, rising inflation and coordinated intervention by the US and Japan to steady the currency.

Locally, attention focused on key economic data and the South African Reserve Bank’s (SARB) September MPC meeting. The economy contracted by 0.2% q/q in 2Q26, against a consensus forecast of 0.1%, after growing 0.4% in 1Q26. Higher imports and weaker investment drove the decline, while domestic demand remained resilient despite elevated energy costs.

Headline inflation rose to 4.4% y/y in August from 4.3% in July, while core inflation eased to 4.1%. The SARB unanimously raised the repo rate by 25bp to 7.25%, as expected. Citing possible second-round effects from the persistent fuel-price shock, the MPC increased its medium-term headline inflation forecasts and cut its 2026 growth projection from 1.4% to 1.2%, leaving later years unchanged. Further hikes remain possible if inflation risks rise or expectations stay above the 3.0% target.

September 2026 was exceptionally difficult for global bonds, as sovereign yields surged on renewed inflation concerns, higher energy prices, resilient economic activity and heavy government borrowing. The Middle East conflict pushed Brent crude oil up more than 10% to above $100/bbl, while the Fed’s rate increase reinforced a higher-for-longer policy outlook. Large issuance, Treasury supply concerns and weak demand at some US auctions further pressured long-duration debt. The US sell-off was particularly severe. The 10-year Treasury yield rose 54bp to 5.29%, briefly exceeding 5.3%, while 3- and 5-year yields climbed about 60bp. Although the sell-off has made starting yields more attractive, the key question is whether it created an entry point or signals a lasting shift to structurally higher government bond yields.

Local bond yields initially moved higher, reflecting global pressure on government bonds, renewed inflation concerns and rising oil prices. The SARB’s decision to raise the repo rate added further pressure to the front end of the yield curve and reinforced expectations of a higher-for-longer interest-rate environment. Despite these headwinds, a recovery in bond prices towards month-end helped to offset the negative impact of higher yields. As a result, the FTSE/JSE All Bond Index (ALBI) delivered a total return of 0.01% for the month, bringing its year-to-date return to 3.54%.

On the money market front, short-term rates remained at their previous level for most of September, before increasing in tandem with the interest rate hike in the final week of the month. The 3-month JIBAR increased by 21bp to 7.21%, while the South African Rand Overnight Index Average (ZARONIA) rose to 7.10% by month end. 3-month Treasury bill yields rose by 13bp to 7.05%, while 12-month T-bill yields rose by 31bps to 8.10%. 12-month NCD rates also increased by 37bp over the period. 

The South African rand (ZAR) weakened modestly against the US dollar during September. The currency moved from roughly R16/$ to R16.42/$, with considerable volatility along the way. The bigger story was the tug-of-war between South Africa's relatively high interest rates and commodity support on one side, and a stronger dollar, global geopolitical risk and higher oil prices on the other.

The South African fixed income landscape looks cautiously attractive over the medium term, particularly given the high starting point of yields. Government bonds still offer attractive yields, while money-market and shorter-duration assets provide strong income with less sensitivity to further rate increases. Improving fiscal fundamentals and the possibility that inflation eventually returns toward the SARB’s 3% target create scope for meaningful capital gains if interest rates begin to fall, making intermediate-duration government bonds particularly interesting. Inflation-linked bonds also offer useful protection if inflation remains higher for longer.

The main risks are persistent inflation, elevated oil prices, rising global bond yields and rand weakness, all of which could keep SA rates high and push bond prices lower in the near term. As a result, the most attractive approach is arguably to earn the current high carry while maintaining a balanced duration exposure, rather than taking aggressive long-duration positions immediately. Overall, the medium-term risk/reward for SA fixed income looks positive, but with considerable short-term volatility.