Buy: South African 10-year bonds
The yields on South African 10-year bonds were above 11% in April last year as US President Donald Trump launched his “liberation day” tariff chaos. Since then, they have steadily improved, trading below 8% on February 25; these were the best levels since 2015.
We’re now at yields of around 9% because of the war in Iran. This is still attractive, but an end to the war could result in yields dropping, and then capital appreciation would add to the attractive 9% yield.
Moreover, with government debt reducing on the back of a prudent budget and a primary budget surplus, the government will be taking on less debt, so it will issue fewer bonds every year. Assuming demand remains flat (though it is more likely to increase), the reduced supply will drive yields even lower, pushing the capital appreciation upwards.
Sell: US long-dated bonds
For these 10-year bonds, yields peaked at more than 4.5% during the “liberation day” tariff craziness. This spike was largely what caused Trump to blink and withdraw the tariffs, instead promising 90 deals in 90 days.
They are now at 4.4%, just a whisker away from the 4.5% level that got Trump to blink.
But whereas South Africa has less need for debt, the US has a primary deficit. That is unlikely to change any time soon, especially with the (admittedly modest) tariff income now also mostly gone. So, bond issuance is increasing in a market in which demand is probably at best flat and maybe even dropping.
This means a potential capital loss as yields move higher. Coupled with a stronger rand against the dollar, investors will be worse off.