Online Reporter
Dwindling inflation expectations are setting South African government bonds up to extend a rally that’s already taken benchmark yields to five-year lows.
Break-even rates, a gauge of bond investors’ expectations of average inflation, are projecting price increases will stay within the central bank’s 3 percent to 6 percent target range for the next two decades.
The 20-year measure fell this week to 5,77 percent, the lowest on record, except for a brief Covid-induced plunge.
The recalibration of price expectations, fuelled by lower oil prices, a strengthening rand and speculation the South African Reserve Bank will adopt a lower inflation target, have driven a bond rally that’s returned 16 percent in dollar terms this year. That’s more than double the emerging-market average.
“We see scope for further rallies in longer-dated nominal bonds,” said Nolan Wapenaar, chief investment officer at Anchor Capital in Johannesburg.
“In recent months, we have gradually increased duration across many of our domestic fixed-income portfolios through careful bond selection, taking advantage of lower inflation expectations and curve steepness.”
Anchor sees particular value in the 10-year to 15-year section of the curve, Wapenaar said. Yields on 2035 securities have tumbled more than 80 basis points since May, when talk of an imminent change to the inflation target first surfaced, to a five-year low this week.
South African Reserve Bank Governor Lesetja Kganyago said this week that a review of the inflation target is close to completion.
The country’s inflation rate was steady at 2,8 percent in May and has been hovering near or below the floor of the target range for eight consecutive months, creating “opportunistic disinflation” that will help policymakers to anchor price expectations at a lower level, he said. — Bloomberg
