Allan Gray Bond comment - Sep 13 - Fund Manager Comment27 Nov 2013
Global bond markets seem to be stabilising, following a major sell-off between May and August, triggered by concerns that the US Federal Reserve's programme of quantitative easing would be phased out over the next year. While postponed for the moment, this issue of tapering, as it has come to be called, remains a serious concern for investors. Along with other emerging market currencies, the rand depreciated against the dollar by about 10% during the recent market turmoil. The combination of above-inflation wage increases and a weak rand is having an adverse impact on South African inflation, which reached 6.4% in August. Simultaneously, economic growth remains anaemic, creating conditions of stagflation, which pose a serious dilemma for the SA Reserve Bank. Inflation is approaching a level which would normally require an increase in interest rates, but business conditions are very weak which, at very least, would support leaving rates unchanged. However, the statement issued after the Monetary Policy Committee's September meeting suggests that should inflation remain persistently above the 6% target, the SARB will increase rates. The Fund holds a significant investment in longer-dated government and parastatal bonds because long bond yields are already pricing in a pessimistic forecast of future South African inflation. However, a large current account deficit makes the rand vulnerable. Further rand depreciation would aggravate inflation and put upward pressure on interest rates. Accordingly, we still favour a cautious investment stance and the Fund's duration remains below that of its All Bond Index benchmark.
Allan Gray Bond comment - Jun 13 - Fund Manager Comment22 Aug 2013
There was a major sell-off in global bond markets during May 2013. The chairman of the US Federal Reserve Board, Ben Bernanke, made a statement indicating that, with the improving health of the US economy, the US central bank is likely to wind down its programme of quantitative easing over the next 12 months. There followed a rout in bond markets, with the yield on the US 30-year bond increasing from 2.8% to 3.6%. The yield on the benchmark 10-year South African government bond increased from 6.2% to 8.1%. Our bond market experienced significant foreign selling and the rand/US$ exchange rate weakened from R9 to R10. Bond markets are now adjusting to a new reality that central banks will not indefinitely inject liquidity into the financial system, and that investors must prepare for the ending of the era of extremely low interest rates. Since the South African Reserve Bank (SARB) last cut rates by 0.5% in July 2012, South African monetary policy has been on hold. With a weaker rand inflationary pressures are mounting, which makes it difficult to justify rate cuts. However, the economy remains weak with growth significantly below potential, which makes it difficult for the Monetary Policy Committee (MPC) to contemplate any increase in rates. As long as these stagflationary conditions persist, the SARB will be reluctant to change its monetary policy stance. The Fund's duration has long been below that of its benchmark, the All Bond Index. While this remains the case, we have taken advantage of the big decline in bond prices to move duration closer to the benchmark. However, with South Africa continuing to have a serious current account deficit, the rand exchange rate remains vulnerable and a cautious investment stance continues to be appropriate.