by Cees BruggemansÂ
With SARB last week reiterating a strong awareness of ever more “discerning” capital flows in response to unfolding global central bank actions and financial market conditions, one can only be intimidated by what is currently playing, and potentially still unfolding.
On an average day now, a few trillion Dollars of rich country government bonds is trading at negative yields, meaning less than 0% yield. Some 10%-15% of such outstanding bonds are already affected, and the trend is for more. Countries already netted include core Europe, Switzerland, Denmark, Sweden, Japan.
It is being noted that many institutions and investors, when they can, refuse buying these bonds, in the process putting the search for yield into hyper drive. This search continues to be biased towards safe yields and income-producing assets (including quality companies with steady dividend streams). But as this search gets ever more frenetic, it pushes out boundaries further afield in the global asset universe. Searching for yield continues to intensify.
The push into negative yield is driven by two main sources, central bank bond buying shrinking the available pool, and its instigating drivers (disappointing growth, falling inflation, and the perceptional fear of deflation).
On this score, the breaking of the commodity supercycle and downswing in Dollar commodity prices since 2011 falls within this picture, with oil only a belated participant in this by now generalised rout, both affecting growth perceptions (in many instances not only positive) and deflation concerns (steadily increasing).
South Africa is looking towards 2%-2.5% growth in 2015-2016, subpar for us, but trailing the US by not all that much, and still well ahead of Europe and Japan.
Our inflation was topping 6% in 2H2014, but is now racing towards 3.5% before bouncing, driven by the pump price fall of petrol & diesel. Next year SA inflation should be back in 5% territory as repressive base effects are left behind, causing pop-ups, but probably still (well) below the average of the past two years as inflation momentum may be slowly eroded.
This is assuming the Rand remaining non-roguish, contentious because of future Fed tightening actions but plausible because of ECB/BoJ supportive actions, and especially the hawkish SARB stance on our interest rates (on hold).
So our inflation trajectory, too, seems to have been lowered, justifying bond yield erosion if seen as more than just temporary (something SARB has still to fully buy). Even less willingness may be forthcoming for the belief that the Rand will not go walkabout shortly under the impact of a strengthening Dollar on the back of Fed actions to come.
But such unwillingness, on both scores, may prove malleable, depending on what unfolds. The real driver for us is this rich world search for yield, and where we feature on the “safe” lists. It doesn’t fit well with our Fragile status, yet the world continues to have remarkable appetite for our quality assets/bonds. It makes our bond rating an ever sensitive aspect.
When looking through events, for now these global trends in all their diversity (central bank actions, disappointing growth, falling inflation, deflation fears, narrowing asset pools, search for yield) appear to favour us, along with our own changing inflation and Rand trajectories underwriting appetite for our assets, lowering our yields, too.
Along with SARB, many among us want to know whether this is just a fleeting moment, to be overtaken by new turn of events, where US growth kickstarts the Fed’s hiking cycle, oil stabilizes and then bounces sustainable (rather than merely correcting within a down-trend), rich world inflation trends reverse, deflation fears ease, much greater discernment regarding Emerging Market risk resurfaces (with a vengeance) and unreformed Fragiles get it in the neck.
That remains a risk, distant or not. For now yield seeking remains the fashion. For how long, and how intense it may still get, is not obvious, with a widening range of views as to short & sweet or low-for-long.
The main point: not forever. More importantly: orderly unwound or disorderly? It keeps many on tenterhooks, not only this year, this decade.
