South African bonds ended the week marginally weaker than last week, with the yield on the R153 rising by four basis points to 8,22% and the yield on the R157 rising by one basis point to 7,83%, with concerns around interest rate increases and selling by foreigners weighing on the market.
At the beginning of the week, bond yields drifted higher (weaker) due to concerns over rand volatility and the expectation of Opec’s supply cuts and resultant higher oil prices. In addition, United States data releases pointed to a stronger economy than previously expected, which led analysts to believe that US interest rates would not be cut any time in the next few months.
Foreigners remained net sellers of bonds during the week, “signalling a belief that there is a good chance of domestic rates being increased in February”, according to independent economic analysts RLJP.
“While there were one or two days of net bond inflows from foreigners, these were perceived as opportunities for traders to cover any short positions they might have held, rather than a genuine improvement of sentiment with regard to domestic yields,” explain the analysts.
“Toward the end of the week, oil prices resumed the downward momentum of the last few weeks, and the rand strengthened to levels below R7,20 per dollar. The rand strength was primarily due to dollar weakness as markets responded to particularly bearish comments by US Federal chairperson Ben Bernanke, who stated that the US economy faced a future ‘fiscal crisis’,” they add.
The analysts say domestic bond markets responded to these developments by strengthening, regaining most of the ground lost earlier in the week.
However, then the longer-term outlook for interest rates worsened, with the forward rate agreement (FRA) curve pricing in another 50 basis point rise in the repo rate in February.
“While the risks to interest rates clearly lie on the upside, the central bank may hold off raising rates in February if next week’s inflation data are particularly encouraging, or if oil prices remain soft. However, much of the market is clearly betting on another rate increase,” conclude RLJP. – I-Net Bridge