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The ILB curve steepens, and we expect more

The ILB curve steepens, and we expect more

author

Walter De Wet, Reezwana Sumad

Posted 15/09/2023 2 mins

2 mins

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.

Upward pressure for ILBs comes from more than one source

We expect the upward pressure on real yields to persist, with the pressure emanating from three areas – higher US real yields, South Africa’s (SA’s) budget deficit and switch auctions.
 

Our ILB fair value estimates remain unchanged and our positioning too

Our ILB fair value curve remains unchanged. Our 10-year ILB yield is at 5,1% (vs. the current I2033 at 4,8%), while our 30-year yield is at 5,4% vs. the current I2050 at 5,1%. Although we hold a preference for nominal bonds over ILBs, if we look at ILBs on a standalone basis, our preference is for the 3-year to 10-year bucket. Beyond this, cash competes well.
 

Preliminary budget data for August shows growing budget concerns, supporting our ILB view

The latest preliminary budget data for August confirmed our ILB view last week. Last week, the National Treasury (NT) published the preliminary budget balance data for August, which implies that the preliminary deficit for August is c.R48bn. At this level, the deficit for August is more than twice the size of its historical average. If the R16bn loan to Eskom is expensed, the deficit for August would be c.R64,3bn.
 

Sukuk bond could ease some pressure on the funding requirement

The NT announced that it is planning to issue its inaugural rand-denominated Sukuk bond, which may ease some of the funding pressure.
 

Rand back above 19,00; our fundamental view stands

From a fundamental perspective, our view remains unchanged – if the rand moves towards the 20,00-20,50 range against the USD, we would be very careful to extrapolate further weakness from there. More short term, from a technical perspective for the USDZAR, the range of 19,30–19,35 and then 19,60 should provide resistance. On the downside for the USDZAR, 18,90 and the 18,65-18,70 range should provide support.

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