Bond yields in developed markets rose steadily during the quarter with the benchmark US 10-year bond yield rising from 1.66% to 1.92%, while the yields on the German 10-year Bund became less negative rising from -0.57% to -0.19%. The rise in bond yields was despite the US Federal Reserve (Fed) and European Central Bank (ECB) resuming asset purchases. In November, the ECB starting buying .20 billion of assets while at the same time reinvesting maturities and interest from existing holdings. Following the spike in the overnight rates in September the Fed also announced a $60 billion a month Treasury bill purchase programme until the second quarter of 2020. Risky assets, equities and emerging market assets rallied on the back of the liquidity provision. On 30 October the Federal Open Market Committee reduced the federal funds rate by 0.25% but indicated that rates are likely to remain at current levels for some time.

Optimism improved that the US.China trade dispute will reach a resolution as President Trump tweeted that an agreement was in sight. The two countries have been negotiating rolling back some of the previous tariffs that were implemented in recent months, and not implementing tariffs that were supposed to start on 15 December. Sentiment and risk-taking were further boosted by bounces in PMIs in Europe and the US from their September lows.
Moodyfs giving up on South Africa

The focal point for the bond market in the fourth quarter is always the delivery of the Medium-Term Budget Policy Statement (MTBPS). While the market had come to expect a marked deterioration from the February Budget owing to the extraordinary support for Eskom announced in July, the expectation was that National Treasury would signal measures to rein in spending in the out-year with lower deficits. However, Treasuryfs projected budget deficits of 5.9%, 6.5% and 6.2% relative to GDP in financial years 2019/20, 2020/21 and 2021/22 were not received well by the market. Economic growth has also failed to lift as initially projected. Treasury thus lowered their growth assumptions to 0.5%, 1.2% and 1.6% in 2019, 2020 and 2021. The market, and ratings agencies, will be waiting for the 2020 Budget to see whether the government is committed to reducing the deficits, and signal more prudent fiscal policy. Both Moodyfs and S&P placed the countryfs rating on negative outlook.

The MTBPS was particularly negative for the shape of the curve because the large deficits indicate that National Treasuryfs borrowing will increase from already very high levels. The yield on the benchmark R186 bond rose from 8.155% two days prior to the publication of the MTBPS to 8.565% after the release of the statement. The spread between the long bond (maturity 28/02/2048) and the R186 (maturity 21/12/2016) increased from about 162 basis points to end the quarter at 183 basis points.

Despite the sell-off in November the FTSE/JSE All Bond Index (ALBI) performed in line with the cash benchmark Alexander Forbes Short Term Fixed Interest (STeFI) Composite Index by delivering a return of 1.73% for the quarter as the risk sentiment improved in December. With inflation remaining relatively subdued, demand for inflation protection has been weak. The inflation-linked index returned a negative 0.91% for the quarter. Yields on the I2029 (10-year) rose 0.28% from 3.41% to 3.69%. Credit spreads continued to tighten even as fundamentals have deteriorated. While we do not expect an imminent reversal of the trend, we have noticed that auctions are starting to price within price guidance, rather than below, and market orders to sell are getting within price guidance, rather than below, and market orders to sell are getting longer.