Bonds unlikely to strengthen ahead of rates move

While South African bonds have strengthened marginally during the past week, market analysts say further strength is “unlikely” as the market awaits the outcome of Thursday’s key rates decision.

Bonds strengthened marginally on the week, with the yields on both the R153 and R157 government bonds falling by seven basis points, preserving the spread between the two bonds of about 35 basis points.

“The stronger move by bonds is almost entirely due to the fortunes of the rand, which strengthened substantially on the week to touch levels of R7,12 per dollar. On a trade-weighted basis, the rand recovered almost all of the losses it incurred in March,” said market analysts.

A stronger gold price was seen as being partly responsible for this currency strength, although emerging-market sentiment in general has improved since the emerging market sell-off of late February.

“The spread between the United States 10-year benchmark bond and the JP Morgan emerging-market bond index has narrowed to an historical low of 157 basis points, suggesting that emerging-market debt is the most expensive it has ever been, relative to US paper,” the analysts pointed out.

They said it is “highly unlikely” that this situation is sustainable and another “hiccup” in the market could see emerging market yields trend higher once again.
“At the very least, there is little scope for emerging-market yields to fall any further and the next move in yields is almost certain to be upward.”

The analysts said that in a similar fashion, the rand is “unlikely” to strengthen any further over the short term, with domestic inflation fears and a large current-account deficit weighing down on sentiment.

“For the rest of the week, traders are likely to adopt a wait-and-see attitude to the currency as the market awaits the Reserve Bank’s April rates decision. The market consensus is that rates will be kept constant. If rates are left unchanged, this should support the current levels of bond yields.  However, yields should not be expected to fall further for the abovementioned reasons.”

A survey of 15 leading economists by I-Net Bridge has found that the consensus forecast is for an unchanged repo rate at 9% when the monetary policy committee meets to finalise its decision on Thursday next week.

Only four of the economists argued that another 50 basis-point increase is still on the cards as the inflation picture has become more clouded in the past two months.

However, the split of 11:4 in favour of an unchanged decision is in stark contrast to market views, where bond analysts and dealers have pointed out that it seems to be more of a dead heat, with bonds and forward rate agreements at about a 50-50 split.—I-Net Bridge

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