Tertia Jacobs

Tertia Jacobs

Tertia Jacobs | Treasury Economist

FIC | Market Dynamics

  • The global reflation trade was rudely interrupted by a selloff in global sovereign bonds last week. Bond risk premia rose in anticipation of an economic recovery as the rollout of vaccinations gains momentum and COVID-19 infection rates recede. Inflation expectations edged higher, with bond markets testing Central Banks’ reaction functions.

    Bond markets are now starting to increasingly price in an expected rise in global inflation rates in Q2 20, driven by low base effects and higher commodity prices. We however question the extent to which inflation impulses are likely to strengthen in H2 21.  

    The USD index defied market expectations of trading weaker, deriving support from higher US yields. Over the past five days, the USD has appreciated against G10, commodity and EM carry FX. Commodity currencies such as the CAD, NZD, CLP, and AUD depreciated too, but outperformed high yielding currencies such as the ZAR, TRY, and Real. 

    The USDZAR is trading in range of 14.75/$ to 15.35/$, with the surplus on the merchandise trade account continued to raise demand for ZAR even as non-residents exit the bond market.

    South Africa’s interest rate curve flattens as the short-end reprices rate hike expectations, non-resident sell short- and mid-long dated SAGBs and the long-end derives support from an expected reduction in SAGB supply from April 2021.

    Asset package spreads narrow as the swap curve’s repricing of rate expectations exceed the rise in the front-end of the SAGB curve.

    Short-dated FX implied rates decline as the reduction in non-resident long bond positions lower demand for ZAR funding. 

    What we are watching March: Central Bank communication - Fed Chairperson Powell’s speech on the US economy (4/3); ECB (11/3) and FOMC (17/3); OPEC meeting (4/3); US senate’s vote on President Biden’s fiscal stimulus programme of $1.9 trillion; South Africa: Q4 GDP (9/3); SARB QB (11/3); MPC (25/3); public sector wage negotiations.

    Coupon payments on SAGBs in March of R14.0bn and a redemption of the R208 (31/3) of R49bn. Banks own 73%, unit trusts/hedge funds 12%, and non-residents 10% of the outstanding amount.