NAV on 2019/11/19
|NAV on 2019/11/18
|52 week high on 2019/06/28
|52 week low on 2019/01/02
|Total Expense Ratio on 2019/09/30
|Total Expense Ratio (performance fee) on 2019/09/30
Satrix Managers (Pty) Ltd.
South African--Interest Bearing--Variable Term
FTSE/JSE All Bond Index
Satrix Investment Team
Satrix Bond Index Comment - Sep 19
The hunt for yield gains momentum
Developed market bond yields continued to trend lower. Yields on the benchmark US 10-year bond declined 34 basis points from 2% at the end of June to 1.66%. In Europe, the yield on the German 10-year Bund touched a new all-time low of -0.716%. The difference between the US 2-year and 10-year bond collapsed 20 basis points and briefly inverted before the curve re-steepened. However, the inversion between the 10-year bond yield and the Federal Reserve (Fed)’s overnight rate has persisted since mid-May. An inverted yield curve has preceded every recession in the US over the past 50 years.
Despite rate cuts and the subsequent fall in bond yields, US rates remain the highest among G10 countries. A combination of better growth and higher yields relative to the peers led to a stronger Dollar, which gained 3.4% on a trade-weighted basis.
Globally, the stock of negative-yielding debt touched new highs at $17 trillion, however, with the sell-off in September negative-yielding debt declined to about $14 trillion.
On 17 September, the Fed’s secured overnight financing rate (repo rate) touched 10% intraday. The repo rate is the rate at which the primary dealers finance long positions. Under normal market conditions this rate should trade at a similar level to the effective federal funds rate. The dislocation that occurred in September was blamed on quarterly tax payments and settlement of a large T-bill auction. The Fed responded by injecting $75 billion into markets, the first time if has done so since the credit crises. The Fed also announced that this liquidity facility will be available until 4 November.
Local Market Review
In July, the minister of finance announced plans to increase support for Eskom by an additional R59 billion over the next two years. An allocation of R26 billion was made for the current year in addition to the R23 billion announced in the February budget. The increased support for state-owned companies (SOCs) and lower revenue collection by the South African Revenue Service increased the funding requirement for National Treasury. Weekly nominal bond auctions were increased to R4.53 billion from R3.3 billion while the inflation-linked bond auction volume increased to R1.07 billion from R0.67 billion. Prior to the increased issuance announcements bond yields had traded to 14-month lows. The benchmark R186 traded to 7.97% before selling off to 8.47%. The yield curve shape did not react much to the increased bond supply, however, the flattening that would have been expected as bond yields moved higher did not happen. Fitch changed South Africa’s rating outlook from stable to negative due to the increased support for Eskom, while Moody’s also said the move was credit-negative.
The FTSE/JSE All Bond Index returned 0.78% for the quarter, underperforming the SteFI cash index return of 1.83%. The 3-7-year sector delivered the best return of 1.29%. The yield on the benchmark R186 rose 0.235% to 8.32% while the R2035 (16-year bond) yield rose 0.17% to 9.61%.
With inflation remaining relatively subdued, demand for inflation protection has been week. The inflation-linked index returned just 0.25% for the quarter. Yields on the I2029 (10-year bond) rose 0.24% from 3.17% to 3.41%. The yield on the ultra-long I2050 reached a new high of 3.65% in September before ending the quarter at 3.63%.
Credit spreads continued to tighten even as fundamentals have deteriorated. While we do not expect an eminent reversal of the trend, we have noticed that auctions are starting to price within price guidance, rather than below, and market orders to sell are getting longer. We used the opportunity to selectively reduce exposure.
Bond Market Outlook
Contrary to our expectations local factors were the main determinants of performance over the past three months, particularly revenue shortfall and bailouts of SOCs, which pushed projected fiscal deficits for 2019/20 to about 6%. As we head into the Medium Term Budget Policy Statement (MTBPS) the market will fret about National Treasury’s ability to get spending under control. Failure to show a credible fiscal consolidation path will result in heightened rating downgrade risk. The underperformance of South African bonds relative to emerging market peers should have resulted in attractive valuations and this should support the market in any selloff.
In developed markets we think the Fed will continue to ease monetary policy to support growth in the face of continuing tensions and slowing growth. Locally we do not expect the South African Reserve Bank to cut the repo rate in the remaining meeting this year.
We continue to favour nominal bonds over inflation-linked bonds and credit.
The investment objective of the Satrix Bond Index Fund is to achieve a return which will equate to the annual return of the portfolio benchmark which is the BEASSA All Bond Index. This will be a passively managed portfolio which will track the BEASSA All Bond Index.
This portfolio will invest in assets in liquid form, and in high yielding non-equity securities and interest bearing securities including but not limited to public, parastatel, municipal and corporate bonds, inflation linked bonds, loan stock, debentures, fixed deposits and money market instruments. When investing in derivatives, the Manager will adhere to prevailing derivative regulations. The portfolio manager will invest in derivatives for cash flow management purposes, as this is more cost effective, and to enable the investment manager to achieve the objective of tracking the BEASSA All Bond Index more effectively.