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Latest insights from our analysts
4th Annual Nedbank CIB Hydrogen and Fuel Cell Conference
Discussing the latest trends in the global hydrogen and fuel cells markets, and the role this technology could play in the global decarbonation drive.
The ILB curve steepens, and we expect more
The inflation-linked bond (ILB) curve has seen some bear steepening over the past month, with the back end of the curve moving above 5,0% last week. We maintain our view that long-dated ILB yields are still too low, and as a result, we expect further upward pressure and steepness.
Spread between lower inflation and a fiscal bind
We estimate what to expect from spreads on the nominal curve if we are set for more dovish inflation surprises while the fiscal policy bind remains. This result is consistent with our research, which suggests that the back end of the curve remains largely irresponsive to any dovish monetary policy surprise. Fiscally induced inertia in ultra-long bonds is likely to keep the curve steep and, for the time being, we would continue to hold a bias for such an outcome should there be some bull curve flattening.
The "weak China trade" is in the rand; we watch the USD
With the USDZAR at 19,00, the “weak China trade” is priced into the rand, in our view. The rand, being a commodity and emerging market (EM) currency, tracks South Africa’s commodity terms of trade closely. Focusing on the post-pandemic period, the relationship of the terms of trade with the rand suggests the currency should trade stronger rather than the 19,00 level. Where weak commodity prices have led to a weak rand, we believe the larger risk right now lies in a stronger USD in the short term.
Upside for bonds has compressed
Where nominal bonds appeared attractive across the curve for the past two months, much of the upside has compressed for now, in our view. At this point, we believe cash appears attractive relative to the front and back ends of the nominal curve. Our analysis suggests only the 7-year to 15-year bucket appears attractive and provides better expected return than cash. The same goes for inflation-linked bonds (ILBs), although we believe the curve may bear steepen somewhat and shorter maturities may provide better value in an environment where an adverse inflation impulse remains likely.
Bonds, the monetary surprise and fiscal dominance
There is an unwritten rule that says one should favour bonds (or duration more broadly) whenever there is a dovish monetary policy surprise. Some call it “the Golden Rule”. In the case of South Africa (SA), this rule has been highly predictive over the past 20 years. However, fiscal dominance of ultra-long bonds has been diluting this rule, suggesting a structural bias for shorter-duration bonds in a scenario where monetary policy is a key input for one’s bond view.
SARB MPC: Repo unchanged but still hawkish
Against our forecast, the SARB MPC kept the repo rate unchanged at 8,25% due to an improvement in the macro environment...
SARB: Shifting to a 25 bps hike, from 50 bps in May
We expect SARB to hike the repo rate by 25 basis points (bps) this week. The hike will see a reduction of its rate-hike increment, after the last two consecutive 50 bps hikes. At the same time, we project South Africa’s (SA’s) CPI to ease further in June, to 5,6% yoy from 6,3% in May, driven predominantly by lower transport and food inflation.