Money set to flood into South Africa

South African bonds have room to extend this half’s best emerging-market rally after the country’s central bank cut its benchmark interest rate and signalled further reductions are in store as inflation moderates.

The bonds have returned 31% this year in dollar terms, more than double the Bloomberg index of local-currency debt. Since the end of June, they’ve outperformed all other major developing-nation bonds with a return of 16%.

The yield on benchmark 2035 securities fell 7 basis points on Thursday to 8.6%, the lowest on record, after the South African Reserve Bank lowered its key rate by a quarter point to 6.75% and trimmed its inflation forecasts for this and the next two years.

The unanimous decision by the six-member Monetary Policy Committee came after the central bank last week adopted a 3% inflation target, compared with its previous 3% to 6% range.

Investors are also taking heart from last week’s mid-term budget update, which signaled lower borrowing and restrained spending to bring government debt under control.

“The unanimous decision from the monetary policy committee members could mean that the cutting cycle can still grow long legs,” said Adriaan du Toit, director of emerging-market credit research at AllianceBernstein.

“The combination of positive fiscal and monetary policy shifts, which are reinforcing each other, still make for a bullish bond-market outlook.”

Annual inflation accelerated to 3.6% in October from 3.4%. It is expected to average 3.3% this year, compared with a previous estimate of 3.4%, and 3.5% in 2026 from a prior estimate of 3.6%, according to the central bank, which attributed the revisions to a stronger rand and lower oil-price assumptions.

The improved inflation outlook means there is scope for a less restrictive policy stance, central bank Governor Lesetja Kganyago said. Forward-rate agreements are pricing in at least one more quarter-point cut over the next 12 months.

“A more benign inflation outlook and indication of more cuts in the next few months bode well for South African local bonds,” said Sergei Strigo, co-head of emerging-market debt at Amundi.