Are we there yet?

Category: 
Published: 
14 September 2015

The South African fixed income community is on edge.  Since the massive rally in bonds at the start of the year we have effectively been in a bond bear market.  Despite the fact that bonds are interest-bearing instruments – and despite the fact that some of them are yielding almost 9%, returns for the All Bond index since the end of February has been -4.1%.

So the question is, are we there yet?  Can we start buying bonds?  How would we know?

At the end of January the yield on the R186, what is effectively both our benchmark and 10-year bond, was at 7.12%.  Bonds had returns of a whopping 6.5% for the month, but the year ahead was looking a bit bleak.  Inflation was on the rise, the Fed was looking to hike rates this year and yields were just above 1.7% over inflation.  While China has thrown a (rather big) spanner into the works and the Fed has been less than clear about their plans, many of the basic fundamentals remain the same to this day.

We are still expecting a rate hike from the Fed sometime this year.  We are still expecting a breach in the top end of the inflation band, with some analysts calling the inflation peak over 7% in March of 2016.  Inflation in the US is (slowly) on the rise and their economy seems to be continuing its stabilisation.

So, are we there yet?  Almost...

Since February we have seen a series of rising tops on the R186.  8.45% in June, 8.52% in August and 8.6% now in September.  Looking forward, any levels around 8.6% or higher offers buying opportunities, with 8.75% considered to being close to a “fill your boots” level, all else being equal.  Over the last 5 years the R186 has only breached 8.75% twice - in 2011 when it went to 9% and 2014 when it traded at 8.9%.  In both of these cases, going substantially overweight at 8.75% was very lucrative in the long term without being too expensive in the short term.

So yes, we are almost there...