Following a rather disappointing Medium-Term Budget Policy Statement (MTBPS) there was a notable weakening in the local rates market. This, together with a weak SA growth environment and fresh rounds of black-outs implemented by Eskom, increased the likelihood of an SA sovereign ratings downgrade next year. This led to an increase in money market yields last quarter. On a more positive note, however, domestic inflation remains low and supportive of a rate cut, which is in line with most other central banks around the world.
Due to the inherent risks in the economy, the forward rate agreement (FRA) curve is currently predicting rates to remain unchanged over the next 12 months. At present, 12 negotiable certificate of deposit (NCD) mid-rates are at 7.65%, up 5 basis points (bps) from the beginning of the quarter – with the spread between 12 months and 3 months JIBAR now at just over 90bps. We are mindful of the potential threats to the economy and, consequently, will look to add to our fixed rate exposure at levels that we deem appropriate for the risk being taken. That said, we continue to be buyers of SA Treasury Bills as these securities are currently trading at a premium and are offering attractive spreads relative to bank NCDs. Additionally, we remain buyers of longerdated floating rate assets as these instruments help in managing the interest rate risk and running yield of the funds.