Fixed Income

Geopolitical tensions remained a key driver of global markets during August, with developments in the Middle East continuing to influence oil prices and broader risk sentiment. August initially started on a more positive note, with signs of a potential de-escalation in Middle East tensions. Reports that an interim agreement between the US and Iran to reopen the Strait of Hormuz could be imminent reduced concerns around near-term disruptions to global oil supply, pushing Brent crude briefly below US$80/bbl.

This was short-lived, however, as negotiations fell through and tensions escalated, resulting in Brent crude rising above US$90/bbl later in the month and ending August at those levels. The renewed increase in oil prices raised concerns around inflationary pressures and the potential implications for global monetary policy.

FOMC minutes released during the month revealed that members of the Fed viewed US inflation as elevated, with the outlook remaining uncertain, reinforcing expectations that the Fed would remain cautious on the pace and timing of monetary policy easing.

The US Treasury also announced an expansion of its long-end bond buyback programme during August, increasing the size of liquidity-support operations for 10- to 30-year Treasury securities from a maximum of US$2 billion to at least US$4 billion per operation from September. The move came as longer-dated Treasury yields had risen sharply amid concerns over the US fiscal outlook, elevated government borrowing and weaker demand for long-duration debt, with the 30-year yield reaching its highest level since 2007.

The programme aims to improve liquidity and provide additional demand at the long end of the curve where the Treasury had been receiving strong volumes of high-quality offers from investors. The announcement was initially well received, with long-dated Treasury yields falling sharply and providing some support to broader global bond markets, including South African Government Bonds. The impact was relatively short-lived, however, as the programme remains modest compared with the size of the overall Treasury market and is unlikely to address the underlying fiscal concerns driving longer-term yield pressures.

In the South African market, headline CPI inflation moderated to 4.3% y/y in July, down from 5.0% y/y in June and below the 4.5% y/y consensus expectation. The moderation was driven primarily by lower fuel prices and continued food disinflation. Petrol and diesel prices declined by 7.1% and 11.7%, respectively, between June and July, bringing annual fuel inflation down to 20.6% from 34.3% in June. Food and non-alcoholic beverage inflation also continued to moderate, declining to 0.9% y/y in July, its lowest level in more than 16 years, since June 2010 when at 0.7%.

Core inflation, however, edged higher to 4.2% y/y in July from 4.1% y/y in June, indicating that underlying price pressures remain somewhat sticky. The increase was primarily driven by higher prices for furnishings and household equipment, as well as vehicles.

Against this backdrop, global sovereign bonds remained under pressure during August, with 10-year government bond yields rising across major developed markets. The sell-off was particularly pronounced in Japan and Europe, with the Japanese 10-year government bond yield rising by around 14bps to 2.94%, approaching the 3.0% level for the first time since 1996. The German 10-year Bund yield increased by approximately 12bps to 3.32%, while French 10-year government bond yields rose by around 18bps to 4.18%, reflecting renewed concerns around the country's fiscal position and expectations for tighter ECB policy. The UK 10-year gilt yield increased by approximately 1bp to 5.06%.

US Treasuries also remained under some pressure, particularly at the long end of the curve. The US 10-year Treasury yield increased by only 2bps over the month, highlighting that the sell-off was concentrated further along the curve, where concerns around fiscal sustainability, elevated government borrowing and weaker demand for longer-dated debt remained more pronounced.

The local yield curve steepened in August, with the front end of the SAGB curve performing strongly. R187 and R188 yields declined by 14bps and 24bps, respectively, supported by the moderation in domestic inflation and growing expectations of eventual monetary policy easing. In contrast, the long-dated R2048 yield rose by only 1bp. As a result, the FTSE/JSE All Bond Index (ALBI) delivered a total return of 0.69% for the month, bringing its year-to-date return to 3.52%.

On the money market front, movements in short-term rates were mixed in August. The 3-month JIBAR increased by just 2bps to 7.00%, while the South African Rand Overnight Index Average (ZARONIA) remained at 6.86% over the month. On the other hand, 3-month Treasury bill yields declined by 11bps to 6.92%, while 6-month and 12-month T-bill yields rose by 6bps and 5bps to 7.69% and 7.79%, respectively. NCDs recorded a broad-based decline in rates across the curve.

The South African rand strengthened materially during August, appreciating against the US dollar to around R16.12/USD at month-end, from approximately R16.53/USD at the end of July. The stronger rand was supported by broad-based US dollar weakness, higher precious metal prices and an improvement in the domestic inflation outlook. Nevertheless, the currency remained sensitive to global risk sentiment, oil prices and expectations for US monetary policy.

Looking ahead, the global backdrop remains uncertain, with the outlook for oil prices, inflation and monetary policy likely to remain key drivers of global fixed income markets. Against this backdrop, domestic fixed income remains relatively well supported by attractive real yields, improving investor sentiment and favourable valuations relative to global peers.

The resilience of South African bonds, despite renewed global volatility, highlights the market's ability to withstand periods of external pressure. The outlook remains closely tied to global developments, particularly the trajectory of oil prices and the path of US interest rates, which are likely to remain important drivers of risk sentiment and bond market performance in the months ahead.