This week’s report discusses the key market drivers that caused the ZAR and SAGB yields to trade at the top of the year’s range.

The key catalyst of market volatility was the rise in US real yields as the market repriced the terminal rate to 4.5% and hopes of an earlier Fed pivot faded. Equity markets came under considerable downward pressure as the adjustment in the outlook for interest rates holds implications for the growth outlook and earnings expectations, as the Fed is unlikely to relent until the battle against inflation is showing considerable gains. The risk-free rates (against which all other assets are priced) is rising, and the discount rate for future earnings is rising too. This saw the increase in bond market volatility spill over into higher equity market volatility.

The MSCI tumbled by 9.5% to its lowest level since November 2020. 

There were two new developments that emerged after the crash in the UK gilt market: 

• Renewed focus on the high level of leverage built up during the long period of negative to zero interest rates.

• The trumping of UK financial stability over inflation (the BOE stepped into to stabilise by the gilt market with outright bond purchases of GBP5bn per day, days ahead of the planned start of outright bond selling to reduce the QT bond portfolio, which has been postponed).

The high level of volatility could lead to even lower liquidity levels, raising the risk of disorderly trading. In the event of this, the FOMC is likely to dial back on its QT programme. But with the front-end of US money market not yet displaying any signs of liquidity challenges, the FOMC is likely to remain focused on inflation.

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