Local bond market benefits from favourable inflation data and low global government bond yields

Concerns over a weakening global recovery leading to speculation that there might be a return to recession, the so-called ‘double dip’, sent bond markets rallying both locally and abroad.

Recent valuations and market analysis by Prudential Portfolio Managers reveal that the bond market benefited from a combination of favourable inflation data and the low levels of global government bond yields, which may have helped attract foreign inflow to the local market.

“Non-government bonds have been performing strongly in recent months. During July issuers Ekurhuleni Metropolitan Municipality - a first time issuer - and MTN issued bonds in the market. The market received both issues well, indicating some appetite for these “riskier” assets,” says David Knee, Head of Fixed Income at Prudential Portfolio Managers. “Our analysis continues to indicate that there is better value in the corporate and non-government bond area as opposed to government bonds, which now appear quite expensive,” adds Knee.

Prudential Portfolio Managers believe that inflation would need to average 4.5 to 5% in to perpetuity to justify current government bond yield levels. This would be a bold forecast, particularly given that the consensus is for inflation to rise from the fourth quarter onwards, hitting 5.85% in 2012.

“In our valuation framework, our analysts indicate a preference for equities, listed property, corporate bonds and for inflation-linked bonds. Cash and government bonds, on the other hand, offer lower prospective returns,” concludes Knee.