Improved investor confidence following the Reserve Bank's latest policy decision has provided support for South African bonds, but renewed Middle East tensions continue to cloud the outlook.
Image: Ander Gillenea / AFP
South Africa's bond market has regained some stability following the South African Reserve Bank's decision to leave interest rates unchanged, although renewed geopolitical tensions in the Middle East and the United States Federal Reserve's policy decision continue to weigh on investor sentiment.
Investec chief economist Annabel Bishop said South African bond yields experienced significant volatility during July after escalating conflict in the Middle East prompted investors to retreat from emerging market assets.
"South Africa's bond yields have risen this month, jumping on the worsening of the Middle East crisis mid month, with the ten year benchmark bond yield rising from 8.32% at the start of the second week of July to 8.93%," Bishop said.
She noted that market conditions improved after last week's Monetary Policy Committee (MPC) decision.
"The unchanged MPC interest rate stance then aided yields lower at the end of last week, to 8.66%, with momentum towards 8.50%, although there has been marked volatility this year, and the yield dipped below 8.00% before the Middle East war."
According to Bishop, the Reserve Bank's measured approach has strengthened investor confidence.
"The dovish tone of the July MPC statement has improved investor sentiment, with the Governor also underscoring at the start of the month that 'the past two years have brought a significant re rating of South Africa'."
She added that South Africa's improving fiscal position has also enhanced confidence among investors.
"We have had credit ratings upgrades, also exited the FATF greylist. On the fiscal side, we have gone from being a problem child to being a rare example of a country where sovereign debt is expected to stabilise in the current year."
Bishop said inflation is expected to remain relatively contained despite recent volatility in global energy markets.
"With essentially no change in the fuel price likely in August, little pressure is expected on near term inflation."
She added that although consumer inflation reached 5.0% year on year in June, it was unlikely to accelerate further in July because of lower fuel and electricity costs.
"July could see a dip in CPI inflation below 5.0% year on year as the petrol price rose a year ago, versus the drop this month."
However, international developments continue to pose risks to local markets.
Bishop said foreign investors have reduced their exposure to South African government bonds following the renewed conflict in the Middle East.
"The recent escalation in the conflict in the Middle East triggered a bond sell off again from foreign holdings, with foreigners selling R19.8 billion since the 17th of the month, in contrast to the year to 17 July of R54.3 billion in net foreign purchases of South African debt."
She also highlighted warnings from international institutions about the economic consequences of prolonged geopolitical instability.
"The conflict in the Middle East is expected to slow global growth to the lowest rate since the onset of the Covid 19 pandemic amid higher energy prices, steeper inflation, and increased borrowing costs," the World Bank warned.
The International Monetary Fund has also cautioned that "elevated public debt in several major economies leaves sovereign markets exposed to a reassessment of fiscal sustainability, especially if other adverse shocks materialise in tandem."
Meanwhile, Bianca Botes, Managing Director at Citadel Global, said markets were once again being unsettled by developments in the Middle East after Iran reportedly launched fresh attacks on the United States overnight.
"In what seems to be déjà vu, Iran fired at the United States overnight, bringing the new ceasefire agreement into jeopardy," Botes said.
She noted that United States markets delivered mixed performances, with the S&P 500 ending modestly higher, the Nasdaq declining by nearly 1%, and the Dow Jones Industrial Average reaching fresh record highs.
Asian markets also came under pressure, led by the technology focused KOSPI index, while oil prices climbed by almost 4% to around $85 per barrel as investors reacted to renewed geopolitical uncertainty.
"It is D Day for the Federal Reserve interest rate announcement, which will be closely watched." Botes said.
The rand remained relatively stable despite the heightened uncertainty, trading at R16.74 against the US dollar, R19.08 against the euro and R22.26 against the British pound during Wednesday.
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