Malcolm Charles, Portfolio Manager, Ninety One. The last two years have been exceptional for local fixed income investors. The obvious question now is whether that was a once-off catch-up trade, or whether the conditions that drove those returns are more durable than many are willing to admit.
Our view is simple: while returns are unlikely to repeat the fireworks of the past two years, the environment remains supportive. This is not the moment to panic, bank gains and hide in cash. It is a time for perspective, discipline and, above all, calm.
From panic to indifference
2025 was a year that reminded us just how quickly markets can swing between extremes. The year began with genuine panic. “Liberation Day”, when Donald Trump unveiled a sweeping set of tariffs, sent global markets into a tailspin. Equities sold off sharply, bond yields spiked and risk assets were abandoned almost indiscriminately.
By April, recession talk was everywhere.
And then, almost as abruptly, the mood shifted. The feared global slowdown failed to materialise, inflation proved stickier but manageable, and growth – particularly in the US – surprised on the upside. What followed was not euphoria so much as indifference: markets stopped worrying and simply got on with it.
For South Africa, that change in sentiment mattered enormously. When global investors are prepared to take risk, emerging markets benefit, and when they start comparing opportunities on a real-yield basis, South Africa stands out.
Anything but the dollar
One of the defining features of the past year has been the broad-based weakening of the US dollar. After years of dollar dominance, investors diversified, first into developed markets like Japan and Europe, and then increasingly into emerging markets.
South Africa did not outperform in isolation. The rand’s strength was part of a broader emerging-market story. What differentiated us was the support from our terms of trade. Strong precious metal prices, combined with muted oil prices, created one of the most favourable external backdrops we’ve seen in years.
Importantly, the rand is still not fully reflecting that improvement. On fundamental measures, there remains a residual South African risk premium embedded in the currency. Continued reform and policy credibility could see that discount eroded further over time.
Inflation: the quiet hero of the story
If there is one factor that underpins the constructive outlook for bonds, it is inflation. Headline inflation has not only fallen, it has become anchored. The move to a lower inflation target has been a game-changer, reinforcing credibility and reshaping expectations.
At around 3%, inflation is no longer the enemy of bond investors. It allows the Reserve Bank room to cut rates without risking credibility, and it lowers the hurdle for real returns across the income spectrum.
In that context, nominal bond yields of around 8.5–9%* remain attractive. They offer a meaningful premium over both inflation and cash. That differential matters far more than headline yields in isolation.
Fiscal consolidation, quietly doing the work
Bond markets ultimately trade on fiscal credibility. Here too, the picture has improved materially.
The combination of higher commodity prices and restrained spending has delivered a windfall for the fiscus. Mining royalties and taxes are set to add well over R100 billion over the next two years, money that was not baked into budget forecasts.
Crucially, this is not being squandered. Government issuance has been steadily reduced, debt consolidation is under way, and ratings agencies have taken note. South Africa’s recent ratings upgrade by S&P, alongside removal from the grey list, reflects tangible progress rather than hopeful promises.
These developments don’t make headlines every day, but they matter. They reduce supply pressure in the bond market and reinforce confidence among the marginal foreign buyers who ultimately set prices.
Global risks remain, but context matters
None of this is to suggest that risks have disappeared. Global politics, particularly in the US, remain a source of volatility. Any perception of political interference in the Federal Reserve would be destabilising for global bond markets.
But context is important. The US economy remains resilient, inflation is easing gradually, and the global macro backdrop sits firmly in what we’d describe as a “Goldilocks” environment, not too hot, not too cold.
In such conditions, emerging markets are not shunned; they are assessed. And on that assessment, South Africa continues to offer compelling real yields relative to peers.
Can bonds deliver a third good year?
After two exceptional years, it’s natural to ask whether the trade is over. The answer depends on expectations.
Will we see another 20-plus percent total return year? Almost certainly not. But do bonds still offer the potential to outperform cash and inflation meaningfully? In our view, yes.
The key difference today is that cash and inflation – bonds’ main competitors – are weaker than they were a year ago. As rates come down, the opportunity cost of holding bonds falls. Even modest capital gains, combined with attractive income, can deliver respectable real returns.
This is less about chasing returns and more about recognising that the income component is doing much of the heavy lifting.
How this view is reflected in portfolio positioning
In the Ninety One Diversified Income Fund, this environment calls for balance rather than bravado. We remain constructive but selective.
The portfolio continues to emphasise income, with meaningful exposure to government bonds, government-guaranteed entities and high-quality credit, where spreads still compensate investors for risk. Listed property has become more attractive as yields reset, and selective offshore exposure provides diversification rather than return chasing.
Duration is managed carefully, and protection remains an important part of the toolkit. This is not a one-way bet on yields falling further; it is a portfolio built to participate when conditions are supportive and to protect when volatility returns.
Staying the course
The biggest risk for investors today is behavioural. After strong returns, the temptation is to lock in gains and retreat to the perceived safety of cash. History suggests that doing so, just as fundamentals are improving, is rarely rewarded.
We are not arguing for complacency. We are arguing for perspective.
South Africa has made real progress. Inflation is under control. Fiscal discipline is improving. Growth, while still modest, is trending in the right direction. Against that backdrop, yields remain attractive.
Sometimes the hardest thing in investing is also the simplest: stay calm, stay invested, and carry on yielding. DM
Past performance is not a reliable indicator of future results. Forecasts are bases on disclosed reasonable assumptions and not guaranteed to occur. Actual yields may differ.
Author: Malcolm Charles, Portfolio Manager, Ninety One
Ninety One SA (Pty) Ltd is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA).