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The SA Daily 20 April 2018

FRAs and bonds lower

  • After holding quite steady despite several global market disturbances, it was local events that caused the SA bond market to rally. Sentiment regarding SA’s economic outlook was boosted by President Cyril Ramaphosa’s stated aim to attract $100bn worth of private investment, and he has said that businesses are interested in this initiative. Further, the latest SA CPI numbers (for March) continued to reflect a disinflationary trend; CPI is now at 7-year lows.
  • Appetite for SAGBs has rallied on this positive sentiment. Further, the continued benign inflation trajectory saw the SAGB yield curve bull steepen on the expectation that the SARB will deliver at least one more 25 bps rate cut this year.
  • The forward rate agreements (FRAs) curve moved lower after the inflation data, with the market now pricing in close to a 90% probability of a further 25 bps rate cut by the SARB this year. The highest conviction for the additional 25 bps rate cut November (100%). While we believe that a 25 bps cut is likely, this would still require either a further moderation in inflation expectations or more benign inflation drivers than the SARB currently expects (such as less rand depreciation than currently pencilled in). 

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