A few more hurdles to clear in fixed income markets

As we approach the second anniversary of the first rate hike by the South African Reserve Bank, Ninety One SA Fixed Income portfolio managers, Malcolm Charles and Adam Furlan, outline recent developments that suggest we could be at the top of the interest rate cycle.

It has been a tumultuous 24 months for fixed income, and South African fixed income certainly did not escape the broader bear market. Driving this was a combination of stubbornly rising inflation, aggressive monetary policy tightening and souring sentiment among investors – all coupled with some homegrown challenges.

The year began on a positive note, as China finally reopened from its Covid lockdown and US inflation appeared to be slowing. But market sentiment subsequently soured as a combination of resilient economic data in Europe, robust US labour market data and stubborn core inflation in the US caused investors to anticipate tighter monetary policy. This led to a re-appraisal of long-term interest rates, with 10-year US treasuries reaching more than 5% in October.

Interest rates are now expected to remain higher for longer. Rates volatility continued to be the dominant theme, as negative headlines from the banking sector (in the US and Europe) and concerns around US debt ceiling negotiations kept investors cautious. The recent escalation of violence in the Middle East has added to the multitude of geopolitical risks.

Against this challenging backdrop, the SA rates market came under pressure and the rand suffered as a result of a strengthening US dollar and heightened geopolitical tensions – relating to allegations over links with Russia and concerns around a potential visit by President Putin during the BRICS summit. The move by the Financial Action Task Force to greylist the country earlier in the year was a further headwind.

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