Bonds lose further ground as emerging-market jitters add to risk-off sentiment

South African government bonds were weaker on Monday afternoon, as the dollar continued to trade at firmer levels and US bond yields remained elevated.

South African bonds are mainly driven by developments abroad at present, Sasfin Wealth analyst Alvin Chawasema says. “The market is pretty fluid with troubles in emerging markets adding to the risk-off environment.”

It is uncertain when a turnaround in the fortunes of local bonds could be expected, with the benchmark US 10-year bond now trading comfortably above 3%, he said.

This is mainly driven by expectations of a more hawkish stance by the US Federal Reserve in 2018.

Five-year market expectations of US inflation have moved up over the past month as oil prices have risen to multiyear highs, but longer-term measures of inflation expectations remained contained, raising questions about how much the Fed would react to one-off price increases, Dow Jones Newswires said.

At 3pm, the benchmark R186 government bond was bid at 8.685% from 8.61% and the R207 at 7.445% from 7.39%.

The rand was at R12.8195 to the dollar from R12.7755.

The US 10-year treasury was last seen at 3.0753% from 3.0578%.

Signals of compromise in trade talks between the US and China had helped soothe investor fears of a trade war, but the rand remained vulnerable, analysts said.

Domestic inflation data on Wednesday is expected to be closely watched, coming a day ahead of the Reserve Bank’s interest-rate decision on Thursday.

Rates were expected to remain unchanged.