Tertia Jacobs, Treasury Economist and Fixed Income Analyst at Investec joins CNBC Africa for more.
We've seen US Treasuries trade at one-month highs in the hours before President Donald Trump's tariffs reveal, as speculation swirls over the details of the proposed trade action. Locally, the rent extended a decline on track for the weakest closing level in more than a month. For more on the bull and bear case for bonds, we are joined by Investec's Tertia Jacobs, a Treasury Economist and Fixed Income Analyst. Tertia, thank you so much for your time. Before we talk about what's happening on the bond side of things, let's focus in on the dollar for a bit, because at a time where we're two months into President Donald Trump's presidency, when it comes to these escalating tariffs, we've seen that shake the confidence when it comes to the dollar. At a time where the dollar should be seen as a safe haven, and suddenly it's not acting like a safe haven anymore. How are you viewing the dollar? Hi, hello Nastasia. Yeah, that's a very good question. I think there's been a major change in the way investors are looking at America, as well as in Europe. And as you say, you know, if we sort of extended expectations of when Trump became president, the dollar was actually anticipated to rally. Instead, it's reversed all the gains post the victory in November. And I think that can be ascribed to, you know, the tariff outlook, and we're waiting for the big announcements later this evening, I think it's nine or 10 o'clock South African time about what the reciprocal tariffs will look like, is that that uncertainty has started to weigh on U.S. growth expectations. We have seen confidence indicators decline. There's been also a decline in CEO confidence about growth prospects. And then on the other hand, the tariffs will be inflationary. So from that perspective, you know, the market was thinking a stronger dollar would be premised on continued U.S. exceptionalism. That's now being questioned. And on the other side, in Europe, where Europe is now going to take more responsibility for its own accountability, and more fiscal spending will be allocated, especially in countries like Germany, on military and infrastructure. There, the euro also received a boost because, you know, it could be growth positive. So that's actually been the key drivers of the dollar. Given what you've just described, how has the RAND reacted over the past few months in terms of performance? You know, so also a very good question. So the dollar and most other, sorry, the RAND and most other EM currencies then were basically trading on the back of a weaker dollar, because usually when the dollar is weaker, then major currencies such as the euro and the yen tend to be on the front foot. And that also lifts the EM currencies. So that has been one of the reasons why the RAND then rallied to about 1820. It's actually been very stable in a range of, I'd say, about 18 to about 1840 in the first quarter. So it was basically external factors that drove the RAND. When you think about your bull and bear case for bonds coming into 2025 versus where we are right now, has anything changed for you? Yes. So now we've, again, in the context of global uncertainty about what's going to be announced this evening, and how that is going to play out in coming months, we have also seen an increase in SA specific risks. So the RAND now, whereas previously it was mainly driven by external factors such as the czar, we have now seen local SA specific factors reassert themselves. For example, the RAND has gone from about 14, sorry, 1860 to about 1880. It's now at 1872. And all of this has got to do with what's transpiring in parliament and how this budget is going to play out. And then we've also seen an increase in bond yields. Since the first budget was presented in February, and then again tabled in March, the yield curve has started to steepen. So in other words, your mid-long and your long dated bond yields have edged higher by about 30 basis points. And that's all because of fiscal risk uncertainty. How is this budget going to play out? Will the GNU hold? Because those are very important factors for the outlook for the South African economy, which feeds into investor confidence. With what you've just said here around the budget, and I know they're voting currently, so you probably won't get the results for another couple of hours or so depending on how long the process takes. What have we seen in terms of our local bond performance or reaction in the lead up to the debate that happened a little bit earlier on and also right now during this voting? Sorry, Nastasia, just to be sure, are you talking about the performance of bonds in the first quarter? We're talking about the market reaction, the bond market reaction locally in the lead up to that budget debate that took place a little bit earlier on, but also taking into consideration that a lot of these members of parliament are currently voting on the budget right now. Yes. So I would say that the bond market became increasingly jittery over the past few days. And that was all premised in terms of the negotiation, or shall I say the brinkmanship between the ANC and the DA in terms of agreeing how to get the fiscal framework over the line. And I think with last night's approval of the fiscal framework, with a lot of questions about the legality of this fiscal framework being adopted with the conditionality that VAT must not be increased and other revenue sources must be found, it's just leaving a lot of uncertainty because depending on what transpires later this evening with the outcome, there may also be lengthy legal processes to question or deal with last night's outcome. So I think all of this is creating uncertainty, and that means it's risk of people, investors are stepping to the sidelines to see how all of this is going to unfold. And that basically means your bond yields are rising. So we see our 10-year bond yield now trading at 10.8 percent compared to about 10.2 percent earlier in the year. Given that, how are you positioned at this point in the cycle? You know, so if one can say bar these current dynamics, right, one could say the inflation outlook is constructive. We would have expected more rate cuts from the MPC when the budget hurdle have been passed, if we know how the Trump tariffs are going to play out. So that would actually have been government bond supportive, and we would have expected bond yields to rally. But in terms of how things are playing out at the moment, and it's a very binary scenario now, I think the best part of the curve is actually in the belly of the curve. So that's round about your 2032s, your 2035s, that part of the curve. When you look at the U.S. and I suppose the predicament that these tariffs could have when it comes to Jay Powell's inflation fighting agenda going forward, how far do you think the Fed can go? Also a good question, you know, and it's also shrouded in uncertainty. So the go-to for the market is usually the Fed's median dot plot that was presented in its March FOMC meeting. But what we've seen there is that the Fed also not made very strong assumptions because of the uncertainty. So that basically means that the growth outlook and the inflation outlook can all be revised as more of the tariffs become effective. So they've basically said that if we assume a slight decline in GDP growth and a slight uptick in inflation, we can see about two 25 basis point rate cuts during the course of the year. But so the risks to the economy then is to the downside. So say the job cuts by Elon Musk or some of the confidence indicators that shows consumers could spend less or businesses will start to invest less, could actually see a faster decline in economic growth, but especially a decline in job creation that could actually precipitate the Fed to cut rates more. And then another factor that can perhaps influence bigger rate cuts is say the U.S. equity market drops significantly because that leads to tighter financial conditions. And we know that also has an impact on growth. So I think for more rate cuts, those two things have to materialize because it also could help that the increase in inflation could be more temporary. Tosha, thank you so much for your time. That was Tosha Jacobs, rather, who is the Treasury Economist and Fixed Income Analyst at Investec.
Theme: Impact of Global Trade Uncertainty and Local Fiscal Risks on South Africa's Bond Market
In the midst of escalating global trade tensions and local fiscal uncertainty, South Africa's bond market is experiencing fluctuations in response to a volatile economic environment. The recent trade actions proposed by President Donald Trump have led to speculation and uncertainty in the financial markets, causing US Treasuries to trade at one-month highs. Additionally, the South African rand has weakened against the dollar, reflecting the impact of external factors on emerging market currencies. Investec's Tertia Jacobs, a Treasury Economist and Fixed Income Analyst, shed light on the current state of the bond market and the factors influencing bond performance. Jacobs highlighted the shifting investor sentiment towards the dollar and emphasized the impact of trade tariffs on U.S. growth expectations. As the dollar's safe-haven status comes into question amid trade uncertainties, the euro has received a boost from increased fiscal spending in Europe, leading to a shift in currency dynamics. Regarding the rand's performance, Jacobs noted that the currency has been trading in a stable range driven by external factors, particularly the strength of major currencies like the euro and the yen. However, she highlighted the emergence of local South African risks impacting the rand's movement, signaling a shift from external to internal drivers of currency fluctuations. Looking ahead, Jacobs discussed the implications of global uncertainty and local fiscal risks on South Africa's bond market. She pointed out the increase in bond yields due to fiscal uncertainty surrounding the budget and parliamentary developments. The steepening yield curve has raised concerns about the impact of fiscal risks on investor confidence and economic stability. In light of the ongoing parliamentary debates and budget negotiations, Jacobs highlighted the jittery behavior of the bond market, with investors adopting a cautious stance amidst uncertainty. The fluctuating bond yields and market volatility reflect the apprehension surrounding the budget outcomes and the legal implications of fiscal decisions. When asked about investment positioning in the current economic cycle, Jacobs emphasized the importance of considering inflation outlook and rate cuts in response to market dynamics. She identified opportunities in the middle section of the bond curve, citing potential government bond support in the midst of evolving economic conditions. On the global front, Jacobs discussed the Federal Reserve's potential response to trade uncertainties and their impact on inflation fighting measures. She highlighted the Fed's cautious approach in light of uncertain growth and inflation projections, underscoring the risks of economic downturn and job cuts influencing rate cut decisions. In conclusion, the evolving global trade landscape and domestic fiscal challenges are reshaping South Africa's bond market dynamics. With heightened uncertainty and fluctuating economic conditions, investors are navigating a complex financial environment characterized by shifting currency dynamics and evolving investor sentiment.
"Depending on what transpires later this evening with the outcome, there may also be lengthy legal processes to question or deal with last night's outcome. So I think all of this is creating uncertainty, and that means it's risk of people, investors are stepping to the sidelines to see how all of this is going to unfold."
South Africa, bond market, trade tensions, global economy, US Treasuries, Donald Trump, tariffs, currency dynamics, fiscal risks, investor confidence, Federal Reserve, economic uncertainty