Interest rate hike on the cards for South Africa
South Africa’s central bank said it’s monitoring the market and is ready to take action in the event of major dysfunction after the worst bond selloff since the outbreak of the pandemic.
Traders have priced out any chance of a rate cut when policymakers meet later this month, and are now positioning for hikes after that.
Forward-rate agreements are fully pricing a 25-basis-point increase by year-end. As recently as last month, they were betting on 50 basis points of cuts.
“Clearly, the market pricing out all the rate cuts by SARB makes sense as there are first-order and second-order effects of the rise in crude oil that impact local fuel and diesel and spill over into CPI,” said Michael Grobler, a fixed-income strategist at Ashburton Fund Managers Ltd.
“The SARB will be hesitant to cut for the foreseeable future.”
The benchmark government 10-year yield jumped 23 basis points on Monday, taking its rise since the start of the Iran war to more than 70 basis points, the most in a similar period since March 2020, when Covid lockdowns roiled global markets.
At that time, the South African Reserve Bank stepped in as a buyer of government bonds as liquidity dried up.
The central bank has “a number of tools” at its disposal should the situation repeat itself, Deputy Governor Fundi Tshazibana said in an interview Monday, adding that the guidelines for using them are “very clear.”
“South African financial markets are generally very resilient to shocks. They’re well functioning, and by well functioning, we don’t mean prices will not go up, but what you want is you want price discovery to happen,” she said.
“And so we’re constantly monitoring financial markets to assess if there is a dysfunction.”
Eyes on this week’s bond sale
While the situation doesn’t yet call for central bank intervention, traders will closely watch Tuesday’s bond auction for signs of demand stress, said Michelle Wohlberg, a fixed-income analyst at Rand Merchant Bank.
“It’s probably a little soon to expect a SARB intervention just yet, but obviously the move higher in yields will result in margin calls on futures positions, etc., which will result in the need for more liquidity in the market,” she said.
The selloff was fueled by concern that soaring oil prices and a weaker rand would fan inflation, forcing the central bank to resume interest-rate increases.
That reversed a rally that drove South African yields to decade lows last month amid confidence the SARB is on track to meet its 3% inflation target, while the economy benefited from elevated precious metals prices.
Foreign investors, who’ve helped drive the rally, were net sellers of R18.2 billion of the debt on Friday, the most in records dating back to 1996, according to JSE Ltd. data.
“When foreigners sell in size, the local market can struggle to absorb that flow quickly, which is why yields are jumping rather than moving gradually,” said Kristof Kruger, a senior fixed-income trader at Prescient Securities.
“It’s volatile, but the market is still functioning — it’s not yet the kind of dislocation that would normally force the SARB to step in.”
Loading ...