South African bonds strengthened this week in line with US treasuries and this despite negative news for domestic inflation and credit demand, but once these domestic factors do come home to roost, a fall in prices could be expected, say analysts RLJP. "It would seem that only international factors are containing domestic yields at current levels, and one feels that bond prices must fall as domestic factors come to the fore again in the coming weeks. It seems that most analysts expect Tito Mboweni to announce another 50 basis point rate hike at the October MPC meeting, however it will be the governor's tone and his outlook for inflation that will be watched even more closely," say The yields on the R153 and the R157 were both 8.
58% on Friday, down from 8.63% and 8.66% the previous week respectively.
"Traders were enticed into the local bond market on the back of the fall in oil prices and poorer growth sentiment in the US. As a result US treasuries strengthened this week as expectations increased of a 25 basis point US rate decrease. "Consequently, the spread between US treasury yields and domestic yields widened and foreigners have found value in local paper.
Many foreign traders, particularly in Japan, where fixed income yields are only around 1-2%, have taken a longer term view on the bond market and have bought in to bond weakness of late, backing the rand to correct to stronger levels," However RLJP said that bond market analysts believe that domestic bonds are overpriced, and that the yield curve is bound to move higher as traders begin to price bonds correctly. "Part of the reason for this belief is that although there are signs of cooling US growth and consequently lower inflation going forward, domestic pipeline inflation pressures remain a serious concern. Rand weakness is persisting and could well fall below 8.
00 rand to the dollar, while notoriously volatile oil prices may not persist at current low levels, particularly if US growth prospects turn out to be slightly less negative than currently perceived," they say. "Further, M3 and PSCE growth continue to increase strongly, despite some tentative signs of higher interest rates beginning to have an effect on credit demand at the margin. With liquidity being injected into the economy at this continued pace, the outlook for consumer price inflation in the months does not look favourable," conclude RLJP.
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