2025 overtook 2024 as the strongest single year for South African bonds in 20 years, with all of the relative outperformance coming through in the final quarter of the year. Twenty-year yields fell from a peak of 13.2% in 2024 to 9.2% at the time of writing, translating into a capital gain of almost 40%.

What can appear startling is charting the economic growth over this period, which has stumbled along at a lacklustre pace. This could point to the fact that the starting valuations were just so extreme that they justify such a move in the absence of economic growth, or that investors have bought in with the anticipation of economic growth to come. We think the answer to this conundrum is multifold.

Although South Africa’s gross financing requirement for the 2025/2026 financial year reached a post-COVID-19 pandemic high, significant relief came through the monetisation of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), for which R206bn has been carved out into government revenues and a further R100bn earmarked to recapitalise the South African Reserve Bank to cover the interest cost on newly created reserves. This has lowered the trajectory of the government’s borrowing requirement relative to what it would have been sans GFECRA, and particularly, relative to the map that was drawn in the 2023 budget documents.

Beyond this boost to revenues, one can also see that National Treasury has held the line on spending where it can, although some items in the budget such as pay progression in the government wage bill remain unsustainable. In 2025, a greater portion of the borrowing requirement was attributable to redemptions (as opposed to the main budget balance) than what was experienced during the COVID-19 pandemic. This is easier to fund as one is simply convincing existing debtholders to switch into longer-dated debt as opposed to finding new funders in the local and offshore savings pool.

Another reason being cited for the rally is that South Africa’s inflation has collapsed in both absolute terms and relative to US inflation. As discussed in prior commentaries, if one believes that we will now run inflation at a lower gap to the US on a continued structural basis, then one can argue for a materially lower relative SA fair value bond yield versus recent history. One can also make the case that the last six months of South African government bond performance have simply been a foreigner flow show. In the same time period that the South African 10-year bond has rerated from 11% to 8.3%, Ghanaian 10-year bond yields have rerated from 24% to 16%, and Zambian 10-year bond yields have rerated from 22% to 17%. All jurisdictions have a positive story to be uncovered, with some overlap in the form of a bullish price environment for gold, copper and platinum group metals. That said, it took foreigner investors pivoting on their bearish attitudes to these markets to cause the market to run in some cases, in anticipation of positive growth changes still to come.

On this note, National Treasury data shows that foreign investors put more than R50bn into South African government bonds in September 2025, which is the largest single month of investment on record and many multiples in excess of the fixed-rate bonds that were issued in that month. This caused auctions to reach the level of five to six times of oversubscription. As foreigner investors potentially looked to de-dollarise and search for yield in alternative and comparatively shallower markets like South Africa, yields moved significantly as they lifted available inventory out of primary auctions and from South African primary dealers. This dynamic also sheds light on the lagging performance of SA Inc shares, which continued to see foreigner outflows for the majority of the year.

From a fundamental perspective, one could also make a reasonable argument that a materially lower South African inflation trajectory compared to historical inflation is positive for bond fair values. The lower trajectory, to some degree, speaks to Chinese disinflation, which we are importing through core goods such as automotive, steel, textiles and clothing. This dynamic creates intense competition for South African retail and manufacturing, which is ultimately negative for SA Inc as a whole. For such a rally in bonds to sustain itself, one must believe that SA Inc will recover and that the economy will achieve sustained real growth to support lower real yields compared to both our own history and our own history relative to emerging market and developed market bond peers.

In the last quarter, the Fund again added to Transnet (fully governmentguaranteed) debt at attractive yields and maintained a higher yield relative to the FTSE/JSE All Bond Index at a lower modified duration.