By Robert Brand, Mpho Hlakudi and S’thembile Cele.
South African government bonds extended their worst selloff since the Covid pandemic as concern mounted that soaring oil prices and a weaker rand will fuel inflation, forcing the central bank to resume interest-rate increases.
The benchmark government 10-year yield jumped 36 basis points on Monday, taking its rise since the start of the Iran war to more than 90 basis points, the most in a similar period since March 2020, when Covid lockdowns roiled global markets.
Traders have priced out any chance of a rate cut when South African Reserve Bank policymakers meet later this month, and are now positioning for hikes after that. Forward-rate agreements are pricing in about a 40% chance of a 25-basis-point increase by year-end. As recently as last month, they were betting on 50 basis points of cuts.
“Clearly, the market pricing out all the rate cuts by Sarb makes sense as there are first-order and second-order effects of the rise in crude oil that impact local fuel and diesel and spill over into CPI,” said Michael Grobler, a fixed-income strategist at Ashburton Fund Managers Ltd. “The Sarb will be hesitant to cut for the foreseeable future.”
During the pandemic, South Africa’s central bank stepped in as a buyer of government bonds as liquidity dried up. While the situation doesn’t yet call for similar intervention, traders will closely watch Tuesday’s bond auction for signs of stress, said Michelle Wohlberg, a fixed-income analyst at Rand Merchant Bank.
“It’s probably a little soon to expect a Sarb intervention just yet, but obviously the move higher in yields will result in margin calls on futures positions etc., which will result in the need for more liquidity in the market,” she said.
The Sarb is monitoring the market to assess whether there is a dysfunction, and has “a very clear guideline “on when to step in as buyer of last resort, Deputy Governor Fundi Tshazibana said in an interview Monday. South African markets are well-functioning and generally very resilient to shocks, she added.
“In the event that we assess that there is a particular market dislocation or a dysfunction, as happened during the time of Covid, then the Sarb has a number of tools that we can utilise, “Tshazibana said. Because of the sensitivity of issues, we generally will not announce that this is what the Sarb is going to do. You will always hear from us after the fact.”
The selloff has reversed a rally that drove South African yields to decade lows last month amid confidence the Sarb is on track to meet its 3% inflation target, while the economy benefited from elevated precious-metal prices.
That conviction is now fading. Higher energy costs may feed through to prices from fertilisers to food, fueling inflation, according to Annabel Bishop, chief economist at Investec Bank.
“The oil price shock would likely be looked through by the MPC if short-lived, and without second-round effects flowing into other prices, leaving interest rates unchanged,” she said. “But higher food and other prices would increase the chance of a hike.”
Foreign investors, who helped drive the rally, were net sellers of R18.2 billion of the debt on Friday, the most in records dating back to 1996, according to JSE data.
“When foreigners sell in size, the local market can struggle to absorb that flow quickly, which is why yields are jumping rather than moving gradually,” said Kristof Kruger, a senior fixed-income trader at Prescient Securities. “It’s volatile, but the market is still functioning — it’s not yet the kind of dislocation that would normally force the Sarb to step in.”
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