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SA FIC: A pessimistic reflection of current yields
We analyse what the current nominal curve and ILB curves are reflecting in terms of monetary and fiscal policy.
While the nominal curve right now is much more pessimistic than our base-case assumptions, the ILB curve is not. When looking at the rand, after it hit our target level of 19,00, we refrain from extrapolating current weakness just yet.
Backing out the current curve’s input assumptions
When markets move as they did last week, it is useful to benchmark what the curve is pricing in. Using our nominal-bond fair-value model, we “back out” what fiscal and monetary policy is being implied by the current curve.
Unlike nominals bonds, ILBs are still at fair value
Although the ILB curve has also come under pressure, the current ILB curve does not seem nearly as cheap relative to our fair-value estimate as the nominal curve, even though we use the same input assumptions for monetary and fiscal policy on both curves. The ILB curve vs the nominal curve is somewhat of an anomaly, in our view.
Rand hits our target at 19,00; we do not extrapolate weakness just yet
The USDZAR is now close to 19,00, a target level we held for some time. That said, we thought the rand weakness would be driven more by external factors rather than country-specific events. Our base case right now is not to extrapolate rand weakness just yet.