SA Bond Market

The SA bond market is having another good year. Total return, year-to-date, is 14.0% which compares well with a compound average annual return of 11.3% from 2000 to 2009. The performance during this time (2000 to 2009) was hurt by an exceptionally poor performance in 2009 of -1.0%, although the structural (once-off) break in inflation during the period 2000 to 2005 was a huge benefit for the market. We are likely to see average lower returns out of the bond market over the coming years, certainly relative to the period 2000 to 2005, given that inflation is unlikely to have a further structural break to the downside.

In 2010, the bond market has been fairly erratic on a month-by-month basis. In particular, November 2010 was especially weak with a decline of 1.1%, while July was the best month, returning a positive 4.1%. This erratic performance is partially explained by the monthly swings in net foreign buying of SA bonds. The market was also caught unexpectedly by surprise interest rate developments and lower than expected inflation.

According to INET, foreigners have year-to-date bought R60.8 billion of SA bonds, although in October and November 2010 they sold a combined R9.3 billion. The increased foreign purchases, especially during the first eight months of the year, clearly helped the market’s performance, while the sell-off in October and November 2010 reversed some of the gains. Fortunately, some of the market’s negative performance in November has been recouped in the first few days of December 2010, help by some renewed foreign interest in the market.