SA bond markets first rallied last year on the hunt-for-yield trade, as offshore investors were looking for good returns as they were diversifying away from the dollar.

The weaker dollar environment, largely because of the negative sentiment on the Trump administrations’ policies and attacks on important institutions like the Fed, provided cyclical boosts for SA from a stronger metals prices, lower oil prices and stronger rand point of view.

This quickly boosted the fiscal environment, as experienced in the tabling of the Medium-Term Budget Policy Statement (MTBPS).

Another crucial positive factor was the adoption of a lower inflation target by the SARB, which is structurally positive for bonds. This happened at the time that the fiscal picture was improving, eventually culminating into ratings upgrades – another structurally positive factor for SA bonds.

We think even though the bond curve rallied over 200bps in the last year, the structural elements are yet to fully play out. We think the SARB will cut interest rates three more times this year given the benign inflation environment. We think the budget later this month will show material improvements compared to MTBPS – better revenue numbers and deficits, a primary budget surplus that is higher than MTBPS and lower debt requirement as they are on track to over-fund.

There is also about R80bn of coupon payments in February and March, which increases demand for bonds. These are some of the SA specific factors driving solid bond market returns, especially in the long end of the bond curve. The curve is still quite steep, and we think long end bonds could go as low as 8% this year, and 7.5% on the 10-year bonds.