The Fed and the SARB surprised the markets after their recent meetings. The Fed by providing less forward guidance than was expected and the SARB by not raising short term interest rates. But still leaving expectations of higher short rates to come over the next twelve months largely unchanged. Long term bond yields in the US and SA immediately kicked higher but have since stabilised at higher levels in the US and returned to pre-meeting levels in SA. The US market is currently pricing in a 58% chance of an increase in rates at its next meeting in September while in SA short rates are expected to be about a half a percent higher in twelve months. Expectations that in themselves are not helpful to the bond market.
This minor kerfuffle in the all-important US Bond market has come after a most extraordinary and extended period- since 2010 – sixteen and a half years – of poor returns – and returns more damaging to investors when compared to the excellent returns from US equities realised since then. Seldom if ever has a search for safety in the global bond and money markets been more expensive. In the form that is of extraordinarily good equity returns foregone. Between 2010 and July 2026 the S&P 500 realised an average annual return- capital gains plus dividends- calculated each month of 13.82% p.a. was realised. An index of US Treasury Bonds provided average returns of no more than 2% p.a. over the same period while cash delivered 1.5% p.a.
A realised equity risk premium of over 10 % p.a. is truly exceptional – and a rational reaction to bottom line index earnings growth that averaged over 11% p.a. over the same period. The exuberance of investors in publicly listed shares was justified by a growing bottom line. A case of valuations consistently catching up with underlying performance. 100 dollars invested in the S&P 500 in 2010 with dividends reinvested would have grown to 938 dollars by July 2026. The bond portfolio with interest reinvested in the Index would be worth only 138 dollars by now and a money market fund with interest reinvested in the money market is unlikely to be worth more than 130 dollars after 16 years. Understandable reasons for the risk averse to be crying in their cups.
What is helpful to shareholders – strong economic growth and increasingly profitable businesses- that are willing to invest heavily in future growth– all immediately growth encouraging – adds to the demand for financial capital – for savings – and will tend to raise interest rates. Especially when government fiscal deficits and bond issues are increasing – as they are in the US.
Bond yields in the US have risen recently not because more inflation is expected. Rather because more growth is expected to add to the competition for global savings. A competition that is well reflected in the higher real yields available to investors from low risk fully inflation protected US Bonds. The real yield on a 10-year inflation protected US Treasury Bond is now 2.3% p.a. – higher than at any time since 2010. By coincidence the breakeven yields are also currently 2.3%. That is the extra yield offered to investors in bonds exposed to the risk that inflation may rise unexpectedly. This spread can be regarded as an objective measure of inflation expected in the US over the next ten years. And is very close to the Fed target for inflation of 2% p.a.
Fig. 1; US Long Term Interest Rates- Nominal and Real 10 year Treasury Bonds – and their Spread. Monthly data 2010-2026
Source; Bloomberg and Investec Wealth & Investment
Update to August 13th Daily Data – Yields trending higher- the RSA gives some more
The SA bond and money market provided much more competitive returns to investors since 2010. The difference between the JSE All Share returns and those of the bond and money market- the realised equity risk premiums- have been much more modest- of the order of 3-4 per cent p.a. On average the share market has delivered average rand returns of 13% p.a.- compared to the ALBI Bond Index that delivered an average 9.2% p.a. on average and the money market that delivered 6.3% p.a. on average since 2010. A R100 invested in 2010 would have grown to R734 by July 2026, dividends reinvested, the Bond Index with interest reinvested would have compounded to R478 and a money market fund with interest ploughed back in the fund would be worth R282 by now.
The performance of the RSA bond market since post-Covid 2023 and post the oil shock of March 2026 can be regarded as very helpful for the economy. Long term interest rates have come in and most important the spread between the cost to the SA taxpayer of borrowing dollars for five years rather than rands – the sovereign risk premium – has declined by 2% p.a since 2025 when the GNU was formed-to just over 1% p.a.. And declined further this year despite the oil shock. SA dollar denominated debt is now trading in the debt markets at close to investment grade.
Fig. 2: RSA Longer term Interest rates. 5 year bonds. Daily data
Source; Bloomberg and Investec Wealth & Investment
Daily Data 2026
Update- RSA doing well
Daily Data; July -August 2026. Inflation expected over next five years(breakeven) still elevated- but lower recently as are the respective 5 year and 10 year carries. That is the expected value of the USD/ZAR is lower than it was. The ZAR has recovered strongly across the board. Outlook for inflation therefore declined.
How much more can the SA bond market offer investors? The answer will depend on the fiscal outlook for the SA economy. Will the fiscal deficits be well contained and the debt to GDP ratio continue to decline? If more economic growth were expected the answers would be affirmative in the best sense for interest rates.
The latest news from the fiscal front is now very encouraging. Tax revenues are rising significantly faster than expenditure. Perhaps an extra R90b of revenue this fiscal year ahead of the 2026-27 Budget is possible. Which if it materialises offers some growth and bond market encouraging possibilities. Possibly less to be borrowed and perhaps more adventurously providing capital for essential infrastructure improvements. But growth can only follow if the extra capital so employed can offer cost of capital beating returns. More capital with private sector partnerships, is essential to such purpose. And if expected to be sensibly practiced will add strength to the bond market and reduce the cost of capital to investors in SA. And in turn encourage more private capex to dd to the growth momentum.
The mighty ZAR July =100. Daily Data
The rand rebounds strongly against the AUD, the EM Basket and the USD
