SA bond yields climb this month, and could see further elevation - Investec
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By Annabel Bishop
SA bond yields climb this month, and could see further elevation as those of US treasuries’ see continued pressure, driven by high inflation with little chance seen of a near term easing in price pressures
SA’s ten-year bond yield is now at 9.90% from close to 9.00% early last month, and has seen volatility, with the US treasury yield at 1.53%, from 1.30% at the start of last month, as risk aversion drives SA yields higher and global inflation continues to drive market concerns.
US inflation has remained very sticky as global supply chains have unsurprisingly been unable to resync seamlessly after the sudden break last year, and uneven restarts, which has seen ongoing blockages and resultant price elevation on supply shortages.
The latest PCE deflator reading from the US at 4.3% y/y was above both the consensus expectation and the previous month’s reading, and the core reading at 3.6% y/y, was also above expectations.
These are the preferred measures of inflation for the FOMC, particularly, core PCE, but with the PCE deflator reading at its highest since 2008 and the core PCE deflator at its highest since 1990, markets are particularly worried.
The Fed has said it does not expect supply pressures driving inflation higher to ease any time soon, while high inflation rates are detracting from US consumer spending, in turn impeding economic recovery, although consumer savings have not yet been eroded.
The oil price has also contributed to surging supply side inflation, and so higher US treasuries’ yields, with the Brent crude oil price of US$83/bbl at its highest since 2018, as OPEC+ contributes greatly to high supply side price pressures, with inadequate quota cuts.
OPEC+ has said it will stick to gradual increases in oil output, which has negatively impacted markets, causing oil prices to rise this week, as the cartel, plus associated producers, seek to continue to benefit from high returns from their artificial supply-driven pricing.
High, and rapidly rising, consumer prices act as a natural brake on consumer spending, but also push up wage increases, which in turn is seen as inflationary, and results in monetary policy tightening, or likely withdrawal of accommodation in the current US context.
SA’s bond yields are negatively affected by global financial sentiment, and particularly by the movement in the US bond market, with further elevation in US yields likely to see further deterioration in SA bond yields, adding to the SA government’s cost of funding.
South Africa’s government finance figures show both revenue and expenditure running ahead of a year ago, but revenue is still painfully below expenditure, at R588bn for national government revenue versus R784bn for expenditure, a difference of -R196bn.
June’s budget surplus fell away in July on the massive increase in government expenditure, which swelled to R213bn, far exceeding the R80bn in revenue, as government ramped up expenditure in the face of the riots, while revenues unsurprisingly declined.
With almost half of the fiscal year reported, revenue is at 43.5% of the February budget estimate, and so potentially on track to reach 50% of the estimated full fiscal year in September’s release, while expenditure is at 43%.
The gains made at the start of the year on high revenue intake from strong activity and high commodity prices have been counterbalanced by the negative impact of the riots on business activity and a concomitant rise in government expenditure in the face of the damage.
South African bond yields also deteriorated on the publication of the marked worsening in government finances after the good gains made earlier in the year. The rand is weaker, reaching R15.20/USD today, from yesterday’s close of R15.00/USD.
SA bond yields have lifted on expectations of a repo rate hike this year, and SA’s FRA currently indicates a 2% hike over the next twelve months and close to 3.0% in twenty-four months, which has also elevated SA bond yields.
While the US fiscal cliff is occupying some attention currently, and has previously been used as a political bargaining chip, the US is expected to pass the extra spending, but this will not take away attention from the main driver of elevating US yields, i.e. the nearing of tapering.
The US’s all important data release of non-farm payroll figures is due out on Friday with 488k jobs expected to be added, well above the 235k shock of a month ago, but not that large a figure on its own.
Today’s ADP employment (a subset of aggregated and anonymous US payroll data ) change will give a likely good steer on Friday’s outcome, with the consensus for a 430k lift from last month’s 374k rise.
Annabel Bishop is Investec’s Chief Economist