The bond market's response to the GNU Future growth Asset Management's Rhandzo Mukansi gives his insights into how foreigners 'have been participating here and have contributed to the smooth down we're seeing in domestic bond deals, or conversely the bump up we're seeing in prices'. By Simon Brown 19 Jun 2024 10:38 SIMON BROWN: I'm chatting with Rhandzo Mukansi. He's head of interest rate process at Future growth Asset Management. Rhandzo, appreciate the time today. You and your team had written an article ahead of the election for speaker, deputy speaker and president on Friday around what we might ... and depending on the parliament that we got, we got the Government of National Unity, a coalition parliament essentially. Much of that of course happened after our close. Tuesday has been a big day in our bond market. We had one of the bonds six times oversubscribed, a new issue. We've got yields moving off the bond market markedly lower. RHANDZO MUKANSI: Yes. Thank you very much, Simon. The market definitely opened a lot stronger today. As you mentioned, it was government's nominal bond auction today and that cleared very strong as well. So, as you mentioned, bid-to-covers on long bonds were about six times oversubscribed - so a very, very strong auction today. But even prior to the first parliamentary sitting on Friday, [that follows] fairly strong bond-market movements in response to the coalition government formed between primarily the ANC and the DA last week. So, the market has been responding very strongly to domestic elections, to the coalitions that we've seen arise, and this week really just following on from the strong action we saw last week. SIMON BROWN: Do we get any sense of whether it's foreign or local buying, or does it take time for that data to come through? RHANDZO MUKANSI: We do get daily data that comes through from the JSE, but it is subject to revision. So 'read with a pinch of salt' is perhaps what I'd say, Simon. The more reliable data we see comes out from the National Treasury every once a month, and we won't have sight of that quite yet, of course, in terms of how foreigners have participated in our markets in June. But from the subject as to revised data that we do see, foreigners have been participating here and have contributed to the smooth down we're seeing in domestic bond yields, or conversely the bump up we're seeing in prices. SIMON BROWN: The move, as you say, yield down, price up, which is the way that bonds move. How impactful is this for our interest bill, or is there just so much duration in the debt that the government has that one swallow is not going to make any significant change? RHANDZO MUKANSI: Yes, I think at the moment, Simon, it's probably leaning that way. It will help in terms of lowering the interest pool, but not massively at this stage. That's a function of significant debt stock of course, and that issue still has to be dealt with down the line. So, I would say 'it's helpful but not material at this stage' would be our position on that side. SIMON BROWN: Yes, I imagine, particularly if we are selling 10-year bonds, it takes 10 years to work its way through the system. The one key thing as well is that although we are talking interest rates here these aren't government debt, this is not our repo rate. The MPC [Monetary Policy Committee] members have a whole different decision to make when they meet in July, and again in September and November. They're looking at inflation, they're looking at different data from what we've been talking about in terms of government bond yields. RHANDZO MUKANSI: Very true. So very different parts of the curve, if you will. What we're talking about here is long-dated sovereign bonds with terms to maturity ranging from the 2026 maturity 186 to the 2053 maturity R 2053. As you mentioned, the central bank rate really just speaks to the very short end of what yield curves are both off of, and the consideration there is primarily inflation - consumer price inflation to be exact. So the central bank [members] there concern themselves with inflation growth dynamics, I guess to an extent. And there we've seen domestic inflation remain fairly sticky above 5%. The domestic central bank wants to see inflation fairly consistently towards 4.5%-odd. So there we do still need to see inflation heal towards that 4.5%, or at least inflation expectations yield, and the central bank building comfort that inflation will settle at or around that 4.5% midpoint of the CPI target band. SIMON BROWN: The one point you did make in the note you put out some 10 days ago, [is that] what we have seen is that almost certainly - and never say never, particularly when it comes to inflation - it does look like we've peaked the ECB [European Central Bank] cut; the FOMC [Federal Open Market Committee] did not. But it does look like our next move will be lower. If the question is just not maybe just when we don't know. RHANDZO MUKANSI: Indeed. That's our sense. As you say, first movers there I guess have been the Bank of Canada, the ECB. We expect the US Federal Reserve Bank to follow suit in the second half of this year in line with the Federal dot plot. Again, our view which you mentioned was put out prior to that, but our sense would be that you can have about two 25 basis-point cuts this year. The FOMC seems to agree with that as well, in terms of their latest dot plot pricing in two cuts this year. We think the domestic central bank in that context, in that environment, will also be able to cut perhaps soon in September. But September I think starts to become a live meeting, live in the sense that cuts are actively discussed and voted on in that meeting - and we'd expect the same for November this year as well. So, we think it's possible that you'll get two cuts from the domestic central bank this year, maybe followed through with another two-odd cuts in the earlier part of next year. But all considered we see a fairly gradual cutting cycle, a fairly shallow interest-rate cutting cycle definitely in the context of the steep hikes we've had in the past couple of years. SIMON BROWN: Yes. But I think four cuts, 1% off the prime is music to almost everybody's ears. We'll leave it there. Rhandzo Mukansi, head of interest rate process at Future growth Asset Management, I always appreciate the insights.