With the R153 at current levels of 8,51%, local bonds are no longer expensive but have not yet entered buying territory.
While inflation is well under control in South Africa, it will rise over the next year, especially given the recent rand weakness.
The current long bond yield is still too low and should rise by at least another 0,5%, in order to reach a buying level.
While it is always difficult to estimate the future, we are of the opinion that inflation will probably average about 5%. Over and above this, bonds must have a risk premium. Over time in the United States this risk premium has been about 2%.
Now South African bonds, and all emerging market bonds, should carry an additional risk premium. Our history of this additional risk premium is probably not a good reflection of the risk premium into the future, being as high as 6% on occasion. For want of a better number, I would estimate that 2% is probably reasonable.
So, adding the numbers together, a level of 9% is “fair value” for the R153 bond. Above this is buying territory.
Wayne McCurrie is deputy MD at Advantage Asset Managers