Thematic tailwinds drive yields lower

Balancing the Fed’s dual mandate

Politics in the US continued to hog headlines in the past quarter, driven by the Trump administration’s march to implement its four-pronged policy path, focused on trade, fiscal policy, immigration, and deregulation. Low interest rates are a necessary precondition for the success of this policy path, and the virtues of central bank independence were cast aside as President Trump publicly pressured the Federal Reserve (Fed) to cut interest rates during the quarter. This marked a spectacular encroachment on the previously sacrosanct terrain of monetary policy management and complicates the increasingly fine balance that the Federal Open Market Committee must strike between the Fed’s dual mandate of price stability and full employment.  

The political drama culminated in President Trump's unprecedented firing of Fed Governor Lisa Cook. The Supreme Court has allowed her to remain in her position until oral arguments can be heard in January 2026.  

The Richard Nixon Presidency (1969–1974), and the pressure placed on then-Fed Chairman Arthur Burns to stimulate monetary policy, serves as a cautionary tale for safeguarding central bank independence. Burns is remembered for unduly ceding Nixon’s wishes for accommodative monetary policy measures in the early 1970s, despite simmering inflation pressures and relatively full employment, which ultimately resulted in runaway consumer price inflation for much of the next decade.  

Despite the headlines and risks, spillovers to financial markets remained contained during the quarter. This was reflected in relatively anchored medium-term US inflation expectations and easing bond market volatility. However, the risk of policy error has heightened in this environment, and the Fed’s reaction function to incoming data and the political backdrop will be a key watch point for markets in the months ahead.   

Elsewhere, China continues to gradually tackle its investment excesses and migrate towards a demand-led growth model. This adjustment was always going to be slow and bumpy, with constant disinflationary pressures. The ongoing trade conflict with the US, China’s largest trade partner, adds a further challenge to this macroeconomic realignment.   

Improving RSA sovereign risk profile 

Domestically, Fitch Ratings affirmed South Africa’s BB- long-term, local and foreign currency sovereign ratings, along with its stable ratings outlook, in September. Fitch reiterated the well-documented constraints to an improved sovereign credit rating, including the elevated sovereign debt burden, persistent poverty and inequality, and a constrained and rigid fiscal framework that limits the pace of deficit reduction. While these challenges will certainly persist in the medium term, they are all meaningfully influenced by South Africa’s lacklustre macroeconomic growth backdrop. South Africa’s growth potential remains anchored at an altogether inadequate 2%, but recent structural improvements, including the easing of load shedding constraint, progress in resolving rail and port logistical bottlenecks, and broader reforms under Operation Vulindlela, have contributed to a narrowing output gap. This is a necessary first step toward tackling the country’s social and economic challenges.  

Another positive tailwind is the steps taken by National Treasury and other government agencies to have South Africa removed from the Financial Action Task Force (FATF) greylist. Treasury has reported that all 22 action items have been substantially completed, and it is likely that South Africa’s greylisting will be lifted following the October plenary session. Combined with the recent extraordinary ascent in gold and other precious metals prices, these developments support the case for further easing in South Africa’s sovereign risk premium in the months ahead.  

From an interest rate management perspective, the benefits of an improving sovereign risk profile domestically have been accompanied by easing inflation pressures and a favourable monetary policy backdrop. Headline consumer price inflation eased to 3.3% y/y in August, from 3.5% in July, against Bloomberg consensus expectations (before the print) of 3.6% y/y. This marks a significant downside surprise, led by softer food prices. Domestic price dynamics not only support arguments for further interest rate cuts by the South African Reserve Bank (SARB) but also provide an ideal opportunity to re-anchor inflation expectations lower. The SARB has expertly seized this opportunity, with Governor Lesetja Kganyago extolling the virtues of a 3% inflation target at every opportunity. Both inflation expectations and bond market pricing point to the effectiveness of this forward guidance.  

In the near term, the benign inflation outlook is supported by threats to global growth and easing energy prices. However, global trade policy will continue to lurk as a medium-term risk to both producer and consumer price stability.  

Nominal bonds significantly outperform 

The domestic nominal yield curve bull flattened in the quarter, with the yield on the 10-year maturity R2035 tightening by 80 basis points. The +12-year segment of the All-Bond Index (ALBI) was the top performer of the nominal bond curve, delivering a strong quarterly return of 9.59%, compared to the ALBI’s total return of 6.94%. Cash, as proxied by the STeFI Call Deposit Index, returned 1.75% over the quarter, while the IGOV Index, which comprises sovereign-issued, local currency inflation-linked bonds (ILBs), returned 5.15%. 

Figure 1: Bond market index returns (periods ending September 2025)

Source: IRESS, Futuregrowth 

THE TAKEOUT: Politics in the US continued to hog headlines in the past quarter, driven by the Trump administration’s march to implement its four-pronged policy path focused on trade, fiscal policy, immigration, and deregulation. Low interest rates are a necessary precondition for the success of this agenda, and President Trump's public pressure on the Fed to cut interest rates during the quarter represented a clear encroachment on central bank independence. The Nixon-Burns episode of 1969–1974 remains a cautionary tale of the risks posed when monetary policy becomes politicised. Domestically, an improving sovereign risk profile, easing inflation pressures, and a favourable monetary policy backdrop have anchored local nominal interest rates lower.  

Our investment view and strategy 

Politics will continue to have an outsized influence on financial market performance and volatility in the months and years ahead, as the Trump administration advances its Make America Great Again agenda. Monetary policy management in the US will be a particularly important watchpoint for us, with the Federal Reserve needing to not only balance its dual mandate of price stability and full employment but also to starve off threats to its independence amid heightened political pressure for stimulative monetary policy.  

Domestically, the confluence of a seemingly stabilising fiscal position and an easing monetary policy cycle provides a favourable backdrop for nominal interest rate risk. The attractive accrual and capital benefits offered by nominal bonds has anchored our investment strategy, and we continue to accumulate interest rate risk during periodic bouts of market weakness. We maintain a strategic preference for nominal bonds across the interest-bearing asset class, given their elevated carry and improved capital return prospects. While the inflation carry in ILBs has waned, the asset class continues to offer attractive returns relative to cash in the medium term.  

THE TAKEOUT: Our investment strategy aims to strike a balance between: 1) capitalising on the base accrual (carry) on offer, especially relative to cash; 2) participating in the roll-down potential offered by short-dated bonds; and 3) active modified duration management, seeking to maximise capital gain opportunities.   

Table 1: Key economic indicators and forecasts (annual averages)   

Source: Old Mutual Investment Group