[ADVISOR VIEW] South African bonds have several advantages: high interest rates, low credit rating, and relatively stable inflation. Finding all these advantages together in a different country won't be easy: MichaelHaldane - GlobalLocalZA. Investing
An essential part of the nation’s financial system is the South African bond market. To mobilise savings, manage risk, and set a baseline for interest rates, the bond market is crucial.
There are also a few disadvantages we must consider. The ‘yield’, or the interest paid on bonds, might be quite low. If interest rates increase or inflation expectations increase, bonds may depreciate on the open market. This is because increased inflation or interest rates make bonds’ fixed interest payments less alluring. Compared to riskier assets like shares and real estate, long-term returns are often lower. Over time, cash deposits typically outperform bond returns.
Interest rates influence bond performance because the interest rate has an inverse relationship with bond prices. South Africa has a relatively high interest rate of around 7% compared to other countries like the US, whose interest rate floats between 3% and 3.25%. This means South African bonds are advantageous because if your objective is to maximise returns, it is better to buy bonds when interest rates are high since bond yields rise as the interest rate rises.
South Africa’s inflation rate has edged closer to 7.1% in March 2023, from 7.0% in February and 6.9% in January. While this is obviously not a good thing, it is not that serious. South Africa has done a decent job of stabilising inflation in recent years, keeping it between 3.2% and 6.3%. It is expected that inflation will cool down in the future as the government aims to achieve its target inflation, which is between 3% and 6%.
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