Speaker 0:
Welcome to Asset T V's Bond Master Class with me, Joanne Baham. Today I'm joined by Riza Ishmael, head of bonds, Prescient investment managers. Adam Furlan, Portfolio Manager 91. I'm Melanie Stockett, portfolio manager Dorian Capital.

Speaker 0:
Welcome

Speaker 0:
fixed income and as a class, a lot of people don't seem to understand. But ultimately all we really care about is the global risk free rate. US Treasuries. So, Melanie, we've had quite a year with US Treasuries. Everybody was going along and it hasn't worked out so well. What do you think of the cost of capital argument about risk free at the moment. Where should it be?

Speaker 0:
Yes, So, as always, this is why, um specifically for us in the South African fixed income market, we always start from the outside in. So we always think about where is what we think the risk free rate for for global yields, Um, and the drivers of that are so important. And that then influences, um, largely influences most of our fair value analysis domestically. So if we think about, you know, this has been quite a quite a long cycle. But, you know, just before covid, we had yields. Um at not very elevated

Speaker 0:
levels but rallied significantly during the covid period. So 10 year Treasury rallied to to half a percent, Um, very, very low levels. And we always knew that that was gonna be a headwind to SA I valuation. So that was always far too low and was going to have to rise and then actually rose very quickly. So we saw the Fed act, Um, eventually, when they were out of the starting blocks, they started to act quite quickly and yields rose fast and rose north to north of 4% and now set in that 3.75% range. So we think that's almost the

Speaker 0:
the mid point of the range the trading range that we can expect over over the next year. Now, um, what's going to drive the upside risks to that? So how would yields go higher than 3 75? Obviously, it's going to be inflation. So inflation at this point is expected to decelerated reasonably sticky but come down somewhere towards the Fed's target range. Probably above that, you know that is the base case, and that's what's currently priced into yields. But obviously, if inflation stickier it takes longer to come back down. We would anticipate that yields could be a little bit higher

Speaker 0:
on the 10 year point of the US curve. What could then take yields lower than that? Obviously, if inflation accelerates a little bit faster or you get this immaculate disinflation story that so many people are talking about is one scenario. But another scenario is as growth softens, which it will soften. But the pace of that softening will dictate whether yields, um, operate as the risk free asset that you you want to have in your portfolio, some sort of hedge against recession risk. And that could take yields lower than that. So those are the two drivers.

Speaker 0:
We think we're at the mid point at current levels, and those are the drivers that could take you on slightly higher or slightly low. But I think the point to make is that a large part of that normalisation is now done, so that rise from half a percent to where we are now has been a a very significant change. And so a large part of that journey, um, we're getting towards the end of that. So Adam, let's go back to the story about inflation. You know, on the one side, inflation could be better on one side. It could be worse. What's your view? Because people are paying you money to have a view on inflation. What do you think?

Speaker 1:
So on global inflation specifically, Um, I mean what we've noticed. Well, throughout the whole of last year, we've had very high forecast error of global inflation. So whilst the market was

Speaker 1:
comfortable that inflation was rising quickly and would eventually come down, it was very uncertain about the timing of that. And we saw massive forecast discrepancies from month to month princes. What we're seeing now, um, is that dispersion of greater global economists has, um, has tightened. And

Speaker 1:
the the last US CP I print, for example, was very close to a consensus number. So that gives the central banks a bit more confidence in their forecast and gives everyone a little bit more certainty that inflation is becoming a bit more predictable globally. And, um, the the general expectation is for that to fall with as, um, policy tightening takes effect, Um, as supply side, um, factors dissipate and, um, things like core services, which have been the sticky parts of inflation

Speaker 1:
housing in particular. Um, that that is showing signs of softness and beginning to fall. So So we do see inflation falling quite significantly in the second half of the year globally.

Speaker 0:
OK, Risa, do you Do you think inflation can fall to the sort of target range of 2% which the Fed wants without a US recession? Yes, I think so. And maybe maybe just to

Speaker 0:
to tie together the previous two answers that, um, that have gone before me. Um, I think I I agree with Melanie that I mean the the the the starting point, um, for looking at things should be, um, risk free rates. And we prefer to look a little bit early on the curve. So let's let's focus on the front end of the US curve. And I think that financial asset prices globally are heavily indexed through this process of, um, policy rate normalisation that started about in March 2022. Uh, with place in place like US.

Speaker 0:
Um, but I think the problem that financial asset prices really, really had over 2022 was that

Speaker 0:
unfortunately you you you you had this idea of, um, an open ended tightening of financial conditions in which, unfortunately, you, you had this dynamic in which the starting the starting point or the starting health of the consumer at the point at which policy rate normalisation began in the US was was quite remarkable and extremely atypical in the sense that household balance sheets were quite resilient, were extremely healthy, and consumption at to that point had not really been debt fueled

Speaker 0:
it it it had really been fueled from fiscal transfers, and as a result, then consumers were a lot healthier at the point at which hiking actually started. Now, what that meant was actually that as hiking is going on and as the US is basically throwing the kitchen sink in terms of policy rates, in terms of the the the the size and the pace of of of rate hikes, the consumer was carrying on in a quite resilient manner, and the reason they could do that is because they they had all these, um, fiscal transfer buffers with them along the way.

Speaker 0:
So, unfortunately, now what you had is this this terrible negative feedback loop where the Fed was hiking aggressively But consumption was ticking along and inflation remained elevated for for a lot longer. Right? So that means that financial conditions look to each other and say, Do we need to hike faster? Do we need to throw more at it? And it was this open ended nature of financial conditions and tighten that that threw everything under the bus across the risk complex largely in 2022. And that remains more or less a dynamic. Now

Speaker 0:
you've got a little bit more evidence that inflation is moderating downwards. Um and, um, you know, we we will look to see whether, um where the shelter plays ball, um, and and continues to moderate a little bit as well. But as a as to the the the second part of your question, do I think that that can actually get back to 2%?

Speaker 0:
I think if you look at what's commonly defined as super core inflation, so that would be sort of services shelter. I think there is the That particular area is the one that is most actually sensitive to to the policy rate. I think there is evidence that that is moderating shelter. Inflation will generally come down. But we we know that that operates with a

Speaker 0:
basically a 12 to 18 month lag. So you cannot look to current monetary policy, um, to see whether that's going to react right now. So I think it can very well make its way down to 2%. But the speed of that will largely depend on how shelter reacts within the next 12 to to sort of 18 months. But just back to my specific question. You think, um,

Speaker 0:
that the US government can get inflation? I mean, the so so wrong word the US fed can get inflation done without a recession. Is that your view is the right? That's fine. No, no, that's your view. Me, You Do you agree? Do you think that never happened before? Yes. So I think what's so interesting about watching data dependence means we we watch every single set of data with so much scrutiny and so much anxiety. But I think

Speaker 0:
we have to realise that, uh, monetary policy works with long and variable lags. We hear this and we dismiss it, but it's absolutely true. So if we look at historical analysis, you know, from when you start to hike interest rates. They are different leads and lags. But let's just take two years on average. It takes around two years before you start to see the impact on things like inflation and things like the labour market.

Speaker 0:
Two years from when we started to hike rates in the US is only March next year. So everything that's happening to this point isn't really that influenced our monetary policy. It is, to some extent, on the really, really interest rate sensitive sectors, for sure, you know, that's without a doubt, but we're really gonna see the impact come through only towards the beginning and as we go through next year. So, uh,

Speaker 0:
on the one hand, I want to be careful what I say because I'm an absolute firm believer in inflation credibility, anchoring inflation expectations. I think that the Fed needs to be hawkish. I think they need to send a hawkish message to make sure that especially wage increases don't get entrenched with inflation. Um, so you know, that's a given. I'm I'm a believer in all of that, but at the same time to keep on thinking that we have to continuously hike and even at those outside create hikes at 75 to 50 now we're back down to 25.

Speaker 0:
I think he should be pausing here. I think you should wait, and you should see it. As a central bank, you should be seeing how those, um, transmission effects are coming through to the economy so that you don't overt. And and I think we're only going to see the dynamics in both Labour and inflation start to really unfold going into next year. So I think that's an interesting time. So I think to try to front load this hiking cycle substantially further,

Speaker 0:
I think, would be a policy error. But to not sound hawkish that you've got it under control would also be a policy error. So I think that's an interesting OK, so the Fed is forced to talk tough but not actually do anything. So do you agree with that? The Fed is saying we're going to do another rate, two rate hikes this year. Adam, do you think the feds just talking a good story because it doesn't want the market to run away?

Speaker 1:
I think in all likelihood, um, they will have to, um raise rates further, um, at the next meeting to preserve credibility. Um, so they have told the market that they expect rates at the end of the year to be, um um half a percent higher than where they currently are. Although they paused at the June meeting, Um, they they told the market that June was a live meeting. So there is a potential for a further hike in July. Sorry. And, um,

Speaker 1:
to preserve that credibility and to make the market believe that what they are saying over the longer term is true. They will need to raise rates further. Maybe not the full half a percent, but they will have a lot more data by the time. Um, it comes to November for them to decide on the second one. But I think imminently we will see rates a little bit higher than where they currently are in the US

Speaker 0:
that Do you agree? Yeah, definitely. And and I, I don't want to almost leave you hanging on on the last question and and and feel like we didn't circle that.

Speaker 0:
So So, yes, I do believe that it's it's It's very possible, and certainly in our view. It is certainly a base case that you won't. You you can engineer a path downwards and without significant damage to the real economy. And And just remember what has actually happened here is that you you have a US consumer now that has just run a gauntlet and come out on the other end of what is the most one of the most front loaded and aggressive hiking cycles that they've ever been.

Speaker 0:
Um, and they've come through in in fairly resilient and and and sort of bullet fashion. I mean, there's been there's been a little bit of weakness, but there certainly hasn't been capitulation, right, you know, and the other thing with with regards to what is actually needed to almost bring the labour market back into kilter is not. In fact, that policy should almost induce, um, a lot of unemployment. That's actually a little bit of a misnomer, in fact, because we what we know is that

Speaker 0:
a lot of the the balance can be restored to the labour market by just, um limiting the amount of job openings. In other words, employers who are now advertising for five openings may now only advertised for one, right? So they doesn't. They don't in fact, have to lay off anybody. But in just in terms of how much the labour market is actually wanting, they can actually just do that in a relatively pain free way by just limiting the amount of job openings that they are, um, enforcing the economy. So I think that it should certainly be almost

Speaker 0:
like a base case that there would be a soft kind of landing a relatively relatively pain free kind of, um, experience and inflation in terms of the components that do respond to monetary policy are doing so, and other and other components that will necessarily by computational definition take a bit longer. Those will obviously remain to be seen in the next maybe 12, 12 months or so. I could add one thing to that. Sorry, we could talk about this all day, but

Speaker 0:
essentially, I think what's different now from where we were going into the year is that we do see bank lending conditions tightened. So obviously not off the cliff, um, the SVB crisis as it started to unfold expectations were a lot worse than have ended up being, but you know, bank lending conditions are tightening risk appetite is fading. Um, CRE every single time you pick up a a research article. These days, everyone's talking about commercial, commercial real estate, um, in the US of which banks are obviously heavily exposed to it.

Speaker 0:
All of this just dampens appetite for lending. And that does some of the feds work for it. So I'm not saying that the Fed won't like, You know, we always think about the reaction function of the central bank, and this is a hawkish central bank. And, um, you've got many members on that committee. But I do think that the almost the the Delta or that, um, the pace of acceleration should slow here. For all of these reasons, you do need to give the economy some time to digest what's going on. And it's not just the Fed. Now it's bank lending,

Speaker 0:
um, both from a regulatory side as well as bank appetite, which is starting to fade, and that does some of the the feds work for it. So I just think we're at a different juncture in this cycle than when we were. If we go back a year where it was You know, you had to. You had to have a hammer out and and knock it on its head. It's a lot more. There are a lot more nuances at play this time this year. OK? But I think you also made the point earlier. We're kind of closer to the end than the beginning. I think you probably all broadly agree with that. Um, now, this matters

Speaker 0:
because you guys price a bonds off the treasury rate at some point. So you talked about 3.75 being the kind of the mid point the range. Do you think that's fair value for US Treasuries? I just want a number now from all of you. So what do you think is fair value for US Treasuries? Yes. 3 50 to 4 would be our fair value. About 3 to 3. 50

Speaker 1:
3 50 on the low end, 3 to 3.5 as well.

Speaker 0:
Ok, all right, So now let's get to South Africa. We've got a reserve bank here

Speaker 0:
that seems to think everything is a nail and hits away and tries to control inflation, which arguably is is not demand led supply lead. But I've yet to meet. Ever meet a fixed income manager that doesn't love the So So is the doing a good job? Do you think they should be raising rates? An economy with no growth? What a question. Right, So right, so So the the usual. The answer should really be. Is that I mean, if we if we look at the SOS own

Speaker 0:
sort of monetary policy statements, um, in in years and and one doesn't have to actually go back, um, very far. Um, but let's just say if you if you look at it maybe 2018, 19 and 20 they generally had quite a standard paragraph in the monetary policy statement and it would go something like this. It would say that

Speaker 0:
the Reserve Bank, in their conduct of setting monetary policy, will try to look through exogenous supply side shocks in the setting of monetary policy because they are inherently sort of self correcting. In other words, you don't respond with the oil price necessarily going higher because higher prices begets lower demand, which then begets lower prices again. And then you somehow intervene there by hiking rates,

Speaker 0:
and that doesn't really do any good so monetary policy was designed to operate on the demand side of the economy. However, in contradistinction to that, what we've actually seen is that the Reserve Bank has, in fact, hiked aggressively here in South Africa in response to an inflation process here that it was completely dominated by few food and electricity prices. I mean, completely supply side driven dynamics, right?

Speaker 0:
Um, but but But there was still a conundrum, right? I mean, many, many other central banks, um, you know, were hiking, be it in the EM complex or in the developed world complex. And that does present a conundrum. Um, and you do need to defend the currency, but, um uh, just just in terms of what they what they've actually done, we we just need to realise South Africa is largely devoid of any kind of aggregate demand. Inflation doesn't really come from aggregate demand. Here in South Africa. It's largely through administered prices.

Speaker 0:
So, yes, um, they couldn't well, sit on their hands and do and do nothing. But largely the kind of inflation that we're seeing would have almost been self correcting. In any case, um, so you know, we we we'll just have to wait and see how the process eventually plays out. I have to hop in there and you're welcome. By the way, you guys are all welcome to interrupt each other. People don't want to hear from me. They want to hear from you guys. No I. I agree with all of that. But, um,

Speaker 0:
the point I'd like to make is that as a bond manager income manager, we manage across the entire year. OK, so short dated rates, long data rates, long data bonds All of these things are important to us. And for me, having

Speaker 0:
an inflation targeting central bank that's both a credible and a committed inflation target helps enormously in trying to value longer dated bonds. So at least I know I've got an anchor for long data bond valuations. The risk premium is you know, that's a moving target, but there's an anchor for long date bond valuations. If the central bank is committed and credible, and they showed us again the cycle that every single cycle, they show us how committed

Speaker 0:
that they are. So they raised rates early. Long before developed markets central banks did. Um, they continued to hike at outsized increases, inflation peak started to fall. Their forecast showed that inflation was falling and they still continue to operate in risk management mode. So, yes, it's made it incredibly difficult for us to forecast where interest rates go to and where they're going to peak. That is a challenge which you know we're dealing with.

Speaker 0:
But at the same time, it really helps when we're thinking about long dated inflation and inflation expectations. So they're doing what I would as a fixed income manager really want them to do, um, facing these risks. But at the same time, you know, we're talking about different nuances in the cycle. First six months of the year, a lot easier to hike in the second six months because the first six months we've got inflation

Speaker 0:
off its peaks Domestically, we saw a good prince yesterday, 6.3 2nd half of the year. We're back within their target range again, so their 3 to 6% target range we're going to be somewhere 5.5 to 5. That's a much more difficult scenario. We're also going to have a global environment which is maybe slightly different where central banks are peaking, not continuing to hike. So that takes some of the, um,

Speaker 0:
the risk management ability out of their hands and then also food, inflation, food inflation is something that the staff have pointed to time and time again, all of their statements saying that it's high, it's too high. It's continuing to accelerate the things we don't necessarily understand about the food dynamic. And it feeds through to inflation expectations because it's so visible and tangible. We all know what food prices are doing.

Speaker 0:
That's in another reason that's given them the cover to continue to hike. And that's also falling away. We saw yesterday. It's definitively peaked and coming back down again. So all of those factors change in the second half, so they've done what they can do. For now, they might do another 25 but it's We're definitely moving to a scenario now where we're talking 0 to 25 instead of 25 to 50 the rand is a big component of that. So the rand has pulled

Speaker 0:
back, which helps with that argument. But the dynamics are changing, so we are getting near the peak. We're trying to look around a corner we're not too sure where the corner is, but we're getting very, very close to to that peak. Um, and I think between now and the rest the end of the year, whether it's gonna be 25 or not, but 25 or 50 will just depend on the around dynamics because that does have a past to the basket.

Speaker 0:
You something very interesting there. As a bond manager, I like the fact that I can anchor my inflation expectations. But the long end of the curve to me is more of a credit risk story. Adam, my question to you is, if we have a sub that has destroyed the economy because there's absolutely no growth, the bond economy has been killed. Does that worry you from a credit risk perspective, the longer end? So we have got lovely inflations, but the economy is,

Speaker 0:
you know, desperately not growing.

Speaker 1:
So, um yeah, so firstly, I think it's unfair to say the SAB has destroyed the economy. Um, and

Speaker 0:
but But they are not helping with the cost of capital argument in South Africa.

Speaker 1:
So,

Speaker 1:
um yeah, I would say that I mean the reason we have lower growth in the economy is is structural and and there there are other elements that are impacting our longer term growth dynamics. Um, outside of the sort of cyclicality of of monetary policy,

Speaker 1:
Um, how that how that flows through into sort of long term risk, premium and credit risk on the country is is the fact that obviously the FISCUS will be under pressure in the longer run. Tax revenues will disappoint lower because we aren't. Our tax base is is, um, declining. We we are unable to

Speaker 1:
collect as much tax revenues and afford them the debt stock that we currently have and will consistently need to borrow more. So those longer term that longer term risk premium in our curve, I think, is much more much more sensitive to, um, structural reforms and longer term growth prospects in the in the economy than to

Speaker 1:
shorter term cyclical reactions from from the Reserve Bank.

Speaker 0:
OK, fair point in some of your commentaries, Adam, you've written about looking beneath the surface. A lot of actually good changes are happening. So a lot of people are very depressed about South Africa today for a whole host of reasons, we could spend three hours talking about how depressed we all are. But you, in your commentary, talked about that, actually underneath, bubbling away. There are some really good stories happening there. Share some good stories about structural changes in South Africa, please.

Speaker 1:
Well, I think I think the most topical one is, um, energy sector reform. And, um,

Speaker 1:
whilst we are all currently living through an experience where, um, the economy is being heavily impacted by load shedding, Um, what has been changed? Um, in legislation by Parliament, um, in terms of the energy sector is actually a very sort of green shoot for growth going forward. And if you look to,

Speaker 1:
um, import data, uh, of solar or, um, lithium batteries, that has been, um, sort of flying through the roof, Um, and actually impacting our trade balance because, um, the government has opened up self generation, um, outside of outside of Eskom, outside of, um, government owned entities, it has allowed for wheeling across the grid.

Speaker 1:
Um, this this sort of change and reform this reform to that sector will completely change the structure of energy in the country on a 5 to 10 year horizon and will ultimately or should ultimately lower energy costs, um, for the economy and improve long term growth prospects.

Speaker 0:
You Do you agree that we've actually got some green sheets and because everybody talks a really depressing story about S a today? Do you agree with Adam? There's some green sheets there. I couldn't agree more. I. I Absolutely We see those green sheets. I think we have to go through winter, and I know we're at Stage three now, so it doesn't feel so bad. But a couple of weeks ago, one of the reasons why and their credit risk premium just continued to escalate. You know, we had three reasons, or whatever. One of those reasons was absolutely the fear of good Colette's international front pages.

Speaker 0:
You know, it's a real risk probability might be low, but the, uh, the rent risk is huge. You know how that would translate through to all these things? I get all of that. Um, and I think that the sacrifice ratio is something that the is very much aware of, so they understand keeping interest rates higher. Um, it softens the growth outlook, but I would almost think about that question in a way that if you were to drop interest rate by what 23 4%? Is that gonna lift growth substantially? And it probably is.

Speaker 0:
So I do agree with the the set, the governor's point, where he says it's structural constraints that are keeping growth low, not interest rates. And if they don't anchor inflation expectations, then we're gonna have a much worse scenario in a couple of years time. And if they act like that right now, if you can alleviate load shedding, we can get back to energy security, which is what we want. What can that do to growth? You know, different scenarios can play out, but we know that two years ago it took 1% of growth. We know that this year the sales forecast

Speaker 0:
I think it takes 2% of growth. You alleviate that, and suddenly you add a decent growth rate, which you still need more structural reform on top of that. But that does so much more than interest rates. Fair enough. You guys have schooled me. Shut up. Are there any other green shoots that I should be aware of any other kind of things that you're going? They're starting to do the right things. We may not be in the press, but the government is slowly starting to. Are there anything else we should be aware of?

Speaker 0:
No. Right bond managers are always quite negative on the world. Let's go back to S, a fixed income and the yields and offer at the moment. So let's talk about your portfolios and you're running bond portfolios, OK? And I keep being told the yields are so attractive in South Africa. But the long end people are worried about credit risk. So question to you now from a portfolio construction perspective, we are using the best opportunities and and where are you under weight?

Speaker 0:
So I think that commonly we, um I mean listening to a lot of financial journalists, and I mean commonly, uh, listening to other portfolio management talk about how they how they really see South African bond landscape is is really almost a tug of war between two things, right. But what those two things are really will will differ from manager to manager so that the common one is that

Speaker 0:
let's start with the left hand side of the equation. The things that are almost, um, unambiguously compelling about South African bond yields. They you, you, you're getting the The yields are very high. Whether you're talking about in real space or nominal space, the term premium is very high. Yields are really high, very compelling. Right on the other side is that the idiosyncratic things about the South African economy?

Speaker 0:
Um, are very bad, very dire. I mean, we've got low business confidence, weak capital formation. I mean, we've got a very poor and unstable energy grid. All those negative things grey listing the list goes on. So is it really a tug of war between the compelling yields and all these negatively idiosyncratic things or whatever? So we we we prefer actually not to frame it in that way, we agree with the fact that there are, um, you know, very compellingly high real yields. But what's on the other side of it? I think that, um,

Speaker 0:
in fact, global determinants matter so much more than I idiosyncratic things about the South African real economy in, in, in, in, in where bond yields actually settle. And we think what's actually pulling on the other side of the Tuggle war is is is global factors such as global financial conditions, the aggregate amount of global liquidity. Liquidity, Um, sort of like trade weighted dollar strength. Those kind of global variables matter a whole lot more

Speaker 0:
in this tug of war against where Bonds will actually settle. Right, So and we and and and and the economic econometric evidence, in fact confirms that. So I know that reading headlines about grid failure and about, you know, political shenanigans. I mean, those things are very proximate, and it's it's quite easy to react to that and think that that's actually what is actually setting the clearing price of bond yields. But actually, we've got a bit of a different view. We say no, no, actually, it's not that

Speaker 0:
actually, global determinants matter a whole lot more and in fact, is that the global environment has been just so brutal. Um, in the past 18 months that that's actually pulled a lot more. It doesn't get often as as much sensationalist kind of headlines as you can find in in the local press, but we find that that is actually the tug of war that's going on. And so you have this real heels pulling on that side and very, very tight and challenging global financial landscape on the other side. That's

Speaker 0:
can I just interrupt you there, just trying to clear my head and help me out? What have S A bond spreads done versus US Treasuries say, in the last six months, because when I read corporate debt in the US, the spreads are basically non existent, so emerging markets are a type of credit instrument. So what to your argument, if it's more about the global landscape, does that mean spreads in South Africa related to U? Treasuries have fallen?

Speaker 0:
No, it hasn't the certain things. There are occasionally these idiosyncratic, own girls that do get scored like, for example, we we we had this whole drama about, you know, some some arms sale sometime in December. You know, the Lady R, for example, those those kind of stories. And then you had Farm gate to wild

Speaker 0:
before that and from time to time. There are these things that are very particular to South Africa, and you do get a reaction out of the bond market from that. But But what? And and and so to answer your question, it's not really it's not. It's certainly It's obviously not the case that South African, almost like the risk spread, has has compressed relative to US. It certainly has gone up right,

Speaker 0:
But that is a lot more. We think that there are some idiosyncratic nuances in there, but that is because just the the global landscape as well with regards to, um, sort of like the in vagueness of of EM destinations in general has been weak. And that is the same if you consider South Africa, Brazil, Mexico, um, a a lot of commonly commonly, you know, EM destinations that get compared with South Africa too, right?

Speaker 0:
So, um so So So it has. It has it has gone a little bit a little bit wider. But, um, we think that, um if you look at the direction of travel with regards to how financial conditions evolve from here, as you said a little bit earlier, we are almost at the end of the tunnel in terms of, um, policy rate normalisation that will perhaps give rise to a little bit more strengthening in the front end and you know, a little bit of the reverse

Speaker 0:
of this kind of yield inversion that we've seen in the US. The dollar will come off in terms of its strength as they start as the US stops, um, hiking and a number of other financial variables will react in a positive, almost like risk on fashion. And that will actually almost be. We don't we don't like to use this word, but that will almost like be the catalyst that can see a risk risk. Hate the word catalyst, right? Exactly.

Speaker 0:
Um, but but trying to isolate the process that you know that will see some some love given, you know, back to South African bond market, then it's really how those financial variables globally evolve. Melanie, I'm going to bring you in here because research mentioned emerging market bonds. And, you know, we compare our bonds to sovereign bonds off shore in the developed markets. But there are obviously competing forces for other emerging market bonds. How have Brazilian bonds done? Mexican bonds done other emerging markets?

Speaker 0:
It's How's South Africa done in that cohort and and have we seen spreads narrowing or or also widening there? How do we compare on a global landscape within the EM space? So we have underperformed, so if you look at our 10 year yield. We're 11.5. Um, Brazil is probably about 10. Mexico is probably about nine. I mean, I'm using round numbers. That's fine. Um, and there were times not too long ago where we were trading below, particularly Brazil. So we've definitely underperformed. So, you know, I

Speaker 0:
oh, generalisations are so tricky in this market because every single risk event has its own carrot and its own nature. And I completely agree that most of the time, you know, we obsess and think it's something South African specific when actually, it's just a global story. Risk off your not South Africa risk off. But I also think that there are new and there are times when actually, it is South Africa

Speaker 0:
geopolitical story. I felt very uncomfortable with it at the time, so normally you can look through things was worrying in December, Um, because we didn't know what key man risk was and so on, so that that was concerning this felt a little bit like a nanny gate. I hate to bring up Nanny Gate because it was so harrowing for all of us, but it felt a little bit like that to me at the time when it broke. So obviously, since then we've seen the government act quite pragmatically. To some extent,

Speaker 0:
there were so many scenarios that could have played out. And it wasn't the worst scenario, right? But at the same time, you know, we all spent the entire weekend right reading everything from dico reading everything that was playing out, watching that

Speaker 0:
the transcript of the playback from the US mission. Look, all of these things, um, that they were live risks and at the same time, looking at front page of the FT talking about sanctions risks and you know, foreigners don't have, um I mean, they're very competent, but we're a very small part of the global landscape. If they've lost money on Russia and there's sanctions risk potentially attached to South Africa, they're not going to dig deeper than that. They're going to avoid us. So we have underperformed,

Speaker 0:
I think, for the right reasons. Unfortunately, relative to our emerging market peers at this stage, Um, OK, there was pre turkey elections, and let's not get into Turkey. Turkey is maybe not a comparable analysis. Um, but that was a clear negative and I think it's going to take a welfare risk premium to work its way out because we haven't definitively put a lid on the geopolitical story. So this is a new risk, and I think it's something that we are fixing. Her managers are spending a lot of time thinking about, and it's an additional.

Speaker 0:
It's an it's an add on to that risk premium that we've been talking about for so long that I think is probably a little bit more permanent. So I think the load shedding, um, the terms of trade, all of those things. There's a path to resolution where those turn more positively. I do think that this geopolitical, um,

Speaker 0:
risk, risk premium is is probably a little bit stickier, and it's gonna be more permanent. So relative to our emerging market peers that may or may not have that I think that we in foreign investors do should require additional compensation for that relative to those peers that you make. OK, so let's talk about foreign investors, Um, and probably a bit out of date now. But Adam,

Speaker 0:
I think it was about a month ago. I saw foreigners were just hitting the bird every day and getting out of South Africa. They were just selling a bonds, and it looks like lately there might be their toe back in the water. I even believe some of them had the load shed app on their phones, but I don't know if that's free or not. What are the foreigners doing in our bond market? Because they can choose emerging market bonds anywhere?

Speaker 1:
Um, foreign activity has been mixed, and I mean, generally the data that you see over a longer term talks to, um, large foreign outflows. Um, National Treasury data says foreigners used to be 40% ownership of our market. It's now 25. Um that is in the context of a debt stock that has raised that has risen 40% over that period. So, actually, what has happened is foreigners have reinvested

Speaker 1:
a portion of the coupon that they have received, but not all of it. So foreign holdings over the last three years have actually gone up 15% of S a GB SI Think we sit more mostly overweight, Um, consensus wise in, um GB IEM benchmarks. Um, and it's been more a story of outflows from the asset class that has drive that has driven flows out of South Africa.

Speaker 1:
Um, the, um the recent geopolitical tension obviously saw some foreign exiting. Um, it it it's nothing material in the sense that, um, we are now sitting much, much lower in terms of of ownership from foreigners. So I wouldn't say it is a major,

Speaker 1:
a major driver of flows, the recent geopolitical, um, the, um the recent geopolitical tension that we've had,

Speaker 0:
but it could be really positive if they came back in again. Yeah, Yeah, I I'd like to add to that. I mean, II. I think a a major part of of the price formation in bonds has is also to the fact in terms of the non residents ownership that has gone from

Speaker 0:
something with, um, with a 40% handle to something that's around, um, 25%. Now that's that's on official data, right? So they've they the foreigners have almost, um, until very recently the past. Let's even call it a month, month and a half. Um, they've been, like, eerily absent from weekly bond auctions. Now that that dynamic is has has a little bit more to it than than commonly meets the eye because what what actually happens there is that

Speaker 0:
you almost have three. Let's call it three pots of bidders at A at a weekly bond auction. You've got foreigners, you've got the primary list of banks and then you let let's got local players, asset managers and institutions like it. Let's just put that in the third part. Let's just say now now what's actually happened is that a nominal auction is not allowed to fail. That's almost in one of the footnotes there, right? So what happens is that if the foreigners don't come and bid in the auction,

Speaker 0:
the banks have to mop up all the stock, right? You know, in the absence of any any other people that that want to bid for the stock. So what's actually happened now during this period? This 18 months in which you've had things um, developing so brutally with regards to financial conditions, the opportunity cost of foreign capital actually leaving the states in coming years?

Speaker 0:
It has been so high, right? So there's no, there's not been really that much compelling evidence. Uh, you know, um, drive Augusta for them to actually come here So what's not happening is that the banks are sitting along with all the bonds, and it's just been almost a game. There's no foreigners that are coming to the auctions to act as someone sitting on the other side of the trade. And now you have a situation where you have a Lady R event, and now it's almost like a game of Ping Pong between the local banks and the local asset managers in terms of moving script around because there's no third player anymore.

Speaker 0:
So the fact that foreigners have actually gone from ownership of around 40% to 25% now they've almost cashed out. That's hugely consequential. And And as Melanie, I in that one sentence before I interrupted her, Um, no, if they do come back, you know that if they do come back and I really think it's a question of of of when and and not really if right, right, you know, because it must, Right, right,

Speaker 0:
um, and and And when that actually does happen, um, you know it. It can be usually consequential, given that at the moment, the only people that are setting bond prices are almost completely inward focused and are completely local in nature.

Speaker 0:
So as soon as you get someone else on the other side of the table with a completely different information set, like typically, what has happened with foreigners coming to play in years of the past, you can have. You can have some significant price action if that were to happen. So it just reminded me of the Did the warn Melanie Recently, they were a little bit concerned how much the banks in South Africa were buying of our bond market. Did they flag that as one of their

Speaker 0:
flat liquidity in the bond market and in the Financial Stability Review? Uh, and I think they're right to do that. So that was such a great answer. You covered a lot in that, and it's absolutely right because we feel that in the market. So this recent, um, we're talking a lot about the recent event. There's obviously a lot that's happened this year, but just in the sell off from the Lady our story,

Speaker 0:
the market was gapping and but offers were wider, and that's because we didn't have the usual participation from the broad market, which is which is foreigners, and that's not a healthy. That's not the healthiest environment to be in. And and we can feel that. So, um, I think

Speaker 0:
that they right to flag it the financial stability review flags risks that aren't necessarily, you know, front of mind and about to happen and crystallise about to crystallise. Uh, so I think you got to take it with a little bit of a pinch of salt. So some of the headlines that come out of that you,

Speaker 0:
um, must be aware of, but it's not a base case or a central case, But II, I don't disagree with the comments that they made on that. I think that is right. Let's get to government finances. So we've talked about and, you know, the green shoots that maybe in two years time, it perhaps might be better. Every week I see a headline of more people emigrating from South Africa. Then we have this headline about NH I that's just now been passed and how we're going to pay for It's beyond me and we've got government employees seem to be getting increases all the time.

Speaker 0:
This kind of leads to budget deficit issues or not, is actually our budget finances. Fine. So, um, Adam, tell me about budget finance in Africa. And what does this mean for new insurance?

Speaker 1:
Budget finances are not fine. Um, on a forward outlook, and and that is predominantly due to sort of revenue underperformance. Um, so we expect, um, our terms of trade have deteriorated. We expect growth to underperform this year and what the Treasury had forecasted in terms of revenue collection, they are likely to undershoot probably to the tune of close to 100 billion rand. Um, so

Speaker 1:
that's that underperformance obviously requires financing. Um, that that means a wider deficit.

Speaker 1:
What they have to that what they have in terms of, um, financing options at hand. Currently, um, they have been quite price sensitive and a little bit more clever in terms of their, um, issuing strategy, looking for concessional financing, which is cheaper in the dollar space, issuing floating rate notes rather than, um, fixed rate bonds. Because it's a separate pool of capital locally and comes at a cheaper cost.

Speaker 1:
So they do have a few options at hand, which they are using. They also have raised reasonable cash balances, Um, through the sort of commodity boom we've had in 2021 and 2022

Speaker 1:
um, which gives them enough room not to need to increase insurance imminently, Um, on a on a more medium term outlook. If they do continue to underperform on the revenue side, they will need to somehow Reprioritize expenditure. Otherwise, they will eventually need to look to bond markets for insurance increases. But imminently, I don't think there is risk of an insurance increase in S a

Speaker 0:
OK imminently. We have an election next year,

Speaker 0:
and there's a lot of rhetoric that looks very pro, the present government in terms of the things they're doing. Do you agree with the sentiment that, um, it's not an imminent issue around new issues of debt to subsidise these expenditures? I do think that, um, sort of the statements that expenditure is spiralling out of control and so on, which is very easy to to. I'm not saying anyone who has said it. I'm just saying it's easy to say that I think is misinformed. To some extent. I think National Treasury have done a good job where they can, so I think we've seen a lot more consolidation

Speaker 0:
than I would have initially thought a couple of years ago through a quite a difficult period. Um, and if you look at the wage bill just as one example, because you mentioned that, you know, if you had to extrapolate what the wage bill would have done if National Treasury hadn't been very played very hard ball by reining in those increases because it's a cumulative increase, it eats into your revenues very quickly. They've done a very good job with that.

Speaker 0:
Well, there's also a question mark about the the additional revenues. So you know the Post Zuma sort of, you know, the new era where we think so compliance revenues are going to be much higher, and there's some evidence National Treasury points to that. But that's an open question in terms of actual numbers and what we can afford

Speaker 0:
forecast. I do think there's some truth to that, so I think that's good. So the revenue to GDP forecast, which a lot of people dismiss as too optimistic, may be a bit optimistic, but I think there may be some some truth to that. So I think the fiscal consolidation construct,

Speaker 0:
um is not an unreasonable one. We absolutely need growth, though, So when we're looking at 3456 years, if you don't lift growth, we are going to have a problem with our debt to GDP levels increasing. So that's a given.

Speaker 0:
But we don't need to increase growth dramatically. It sounds a lot in South African terms, 2 to 2.5% maybe even three sounds a lot, because we haven't been able to achieve that. But we're an emerging market. What emerging market apart from South Africa doesn't actually achieve those levels of growth? But that's another conversation, I suppose. So, I think you know, we have to give Treasury. Um,

Speaker 0:
I think credit for what they've done, which is a very, very good job at difficult times. They need growth to come through so that they continue with that. But I also think that, uh, we we all worry about pre election spending because we live in um, a continent where that's often a lever that is pulled. We don't really see it this time around, so I know NH. I is contentious it. We can't afford it. Treasury have said we can't afford it, so let's put that in a box for it, It's It's another problem for 10, 15 years time. Whatever the case may be

Speaker 0:
the social relief of distress grant. Of course, it's going to be permanent. You know, we're all forecasting that and putting it into our numbers, but they're being quite clever in terms of how they they phrase it to the population. Um, so III I don't wanna sound like a poll Anna and incredibly optimistic. But I do think that those are those are valid points that we do need to give national Treasury credit for. So I think the fiscal consolidation path that they've embarked upon and held the line on has actually been noteworthy, but without growth in the RT

Speaker 0:
years. Of course, there's a risk premium in Bo for so many reasons, and that is one of the reasons why there's a risk premium there for for those comments. Because me spoke very well on that point. Most certainly no I. I agree with, uh, you know, both both the answers that came before me. Um, you know, there is has been credible fiscal consolidation, certainly. And, um, but I But I do think in terms of a real growth and real activity perspective. The status quo is simply not good enough. Right? So that that simply won't won't do.

Speaker 0:
Um, And if you look at, um, you know, just the budget released a little bit earlier this year, then then then you'd see that in the very, very first paragraph, What What gets flagged there is one of the biggest impediments to to real activity. Truly picking up, um, is an unstable and completely inadequate electricity grid, um, and source of, of stable and reliable power. I mean, that's the one thing there,

Speaker 0:
um, and then and and And I mean, that leads to things that had really been, um, said for the better part of about 10 or 15 years about South Africa, low business confidence, political uncertainty, weak capital formation, all of those things. And it speaks to that and only exacerbates that, right? So that is something that absolutely needs to be addressed. What will truly be a mistake and and and just to tie tie this to some of the,

Speaker 0:
um, discussion that we had in the first part in the first segment is that I mean, is that if if, if if unfortunately, as a as as a reactionary trend to low growth people start turning their focus and their attention towards things. Like for example, um, the independence of the Reserve Bank.

Speaker 0:
And they start, um, you know, forming these narratives that Oh, no. You see, if if they had a little bit more of a a flexible and let's say, um, you know, underclass looking, um, a mandate, then maybe things would be better, and that would be an extremely grave mistake. You know, I I'll give you one small example. If if we if we remember

Speaker 0:
many things happened in March 2020 it was almost like the eye of the storm level five covid kind of thing. But we also happened to get a downgrade right at that time, right? Moody's was the last rating agencies, and if you look through their reports, they will actually see that

Speaker 0:
the one redeeming factor about South Africa, you know, over and about the the stories about inadequate growth in those things was the strength of institutions. That was the one thing that we generally scored quite well on. You know, you got you've got a good independent Reserve bank that is able to, um, shape monetary policy in a credible way. You've got a good judiciary, all of those kind of things right now. The the reality is that

Speaker 0:
it takes about 20 years or longer of history for a central bank to prove credibility to the global. Let's say, the global financial landscape. You know, it takes quite a very, very long time for global capital to believe that the Reserve Bank in a particular country is credible, right?

Speaker 0:
But it may only take a few years for you to remedy things like growth, right? That may be it May. It may even take only like three or four years for us to have a complete and viable solution with regards to, um, for example, electricity, instability, let's just say right.

Speaker 0:
But now turning towards the Reserve Bank and thinking, Let's let's tinker with something there, you know, as a means that would be a massive problem. And that would be that would be a terrible, terrible road to go down. OK, so what I'm hearing today and I think Moody's outlined it, so I'm going to outline the same thing. National Treasury is doing a great job from what you guys are telling me is doing a great,

Speaker 0:
great job. We know the revenue services have massively improved an knowingly so but they have done a really great job. So So there are. Lots of institutions in South Africa are doing well, and we know we know the ones that aren't so. Now let's go back to the portfolio. So you sit here and run a bond portfolio and you've got all these different instruments to choose from. Credit duration and inflation link is what are you doing?

Speaker 0:
So we are at an interesting point where there's a lot of value across the curve. So normally, I would say, here and here. So it's a bullet strategy or barbell strategy. Um, but there's actually for different reasons value across the curve right now because yields are so high and that creditors premium is so high. Um, and high yields.

Speaker 0:
They shelter you a lot from capital volatility. So we're not, uh, necessarily we We used to be a high yield country, but these are very high yields. So, you know, if you run to return scenario analysis, you have to have a big move in yields to have a negative return in a one year year, you have to have more than 2% shift higher in the yield curve. Say that again 2%. So if you buy a 10 year bond today and you hold it for a year, yields have to be a full 2% higher when you

Speaker 0:
exit in a year. Or even then you still got 1.5% total return because yields are so high. So 11.5% on a 10 year bond with the duration of, say, 5 to 6 years, you have to have two times 1% yield shift higher and you guys aren't pricing that in guys, you don't guys don't think that's gonna happen. I'm just saying in terms of the other rhetoric we've had, I think raise rates by 200 basis points. I think it's unlikely and I think that if it did happen,

Speaker 0:
um on a relative basis, other ethic classes in South Africa it would still be the place to be. I'm trying to explain this in layman's terms because you guys took a good story, but like what I sit in front of a client and I put them into a bond portfolio. What risks am I taking? So to hear your point, So that's just interest rate, right? So, back to where you're coming from, you're saying saying 2% rise

Speaker 0:
you would wipe out. Well, you still have a little bit of return left. What are the parts of the market interest you so like, Are you buying inflation? Link is now because you earlier said inflation is starting to come in. Yes, so for nominal. So what are my marginal unit of spend and duration? So just on the curve. Now, where am I adding sort of that marginal spend is actually that 2030 2032. So buys that mature in 2030 or 32. So just less than 10 years

Speaker 0:
because of where we are in the cycle, Right? So there are times where you are, um, in the middle of a cycle, like a rising inflation and interest rate cycle, and you think more in terms of duration now because the cycle is changing, um, thinking in duration as well as where to position across the curve. It's becoming a lot more material in terms of that look, we are thinking of where we're going to. Not necessarily, of course, where we are right now.

Speaker 0:
And if we do get to the point where we are close to a peak in that rate cycle, at some stage rates are gonna stop being raised in South Africa. It doesn't feel like that right now. It feels like it's a neverending story, but as we said earlier, we're close to that point.

Speaker 0:
The next move will be for the market to anticipate a cut at some stage, so the curve will reflect that the short end will rally more. But the I think we're all gonna have different views. But I think that the sweet spot of the curve is that inflexion point is that sort of 8 to 10 year where you don't need much of a rally because yields are high and you get more duration. You don't need much of a rally to outperform the shorter data. So I think both of those areas are attractive.

Speaker 0:
Um, and that's where my marginal unit of duration spend would be. I still like the longer end 15 year 2035 2030 sevens. Because of that yield story that actually a lot of protection against capital volatility because yields are so high. So you want to deploy all of those strategies in the portfolio. But I my additional trades over recent months and we we we sort of immediate.

Speaker 0:
Yesterday, inflation was a little bit better. The short end, those those areas outperformed. So it was 186, 2030 2030 twos outperformed the rest of the curve for those reasons. So that I think, is the right way to play that in terms of inflation link bonds, I haven't found value in them for a long time. You've been hiding in the short end of the curve because it's a very nice hedge against higher inflation risks, so there's been a reason to hold them.

Speaker 0:
As yields kick up towards a real, they trade on a real yield basis. So we're talking 11 50 on a 10 year, um, an inflation link bond gives you inflation compensation, so trades on a real yield, which is much lower.

Speaker 0:
Those were, um, between 3 to 4%. For a long time. Towards the end of last year, they started to rise to 5%. There I think it's interesting those those yields are a lot more interesting. They've rallied a little bit back and then they're not still at that level. But that's where I think, despite the fact that you're getting a higher implied yield by buying a fixed rate nominal government bond where your real yields are 7%. Plus, um, I still think that having

Speaker 0:
some portfolio allocation, depending on your mandate for things like multi portfolios, I think that that does make a lot more sense. The problem is, is that it kind of kicks up and then comes back down again so you can't meaningfully express that for you. But if you looked at our portfolio construction, you'd see that we're ageing. And that's the level where we start to edge into link. Because, uh, as an additional allocation in the portfolio and to your point that you didn't think there was much value in them. And that's why you're starting to see more interest. Just worry

Speaker 0:
time here. But what are you thinking about portfolio construction? How are you expressing your views currently? Yeah, sure. So we also think about sort of like the available universe in total return terms. And I mean, I think that that is a little bit of a a stumbling block very early on where people say, um, the the I mean, the the dry bar has moved up so aggressively maybe 8.5 now. And let's not on maybe 22 or 300 basis points of credit spread on top of that.

Speaker 0:
And and then you're talking about 11 12% at the front end for money market money market proxies. So why would you Why would you not want that? Why would you stick your neck out? Uh, you know, further out the curve. And you you You would do that for the simple reason that you have to. You have to also take a little bit of a curve view, right? So it is based on everything we say and, you know, as you also mentioned, but in everything you say I mean, your central contention must be that yields of your

Speaker 0:
very high and they will compress maybe in the in the next year or so. So we do a little bit of of econometric modelling. And let's just say we we say that the the the the compression should be of the order of of at least about 50 basis points. So if you do that and you look at the bonds that are sitting a little bit outward from the 2035 37 area, you could easily see a total return from the 2037 2040 kind of bond of about 16%.

Speaker 0:
So that's 16% if you have 50 basis points of compression. Now, remember that takes into account your coupon, your convexity, your duration, your pull, depart all those nice things and you've got equity like returns as equity, like returns. Absolutely right, so and so you got So So. That's actually what the animal that you've got to compare to those front end rates that that are attractive but on a total return basis. We still prefer to be in duration rather than credit, right? So it's a basically a 2037 kind of area total portfolio duration of a button,

Speaker 0:
one active. So that's one year active over the all be And in terms of the nominal versus linker question, what we know about there is that normally what people look at is they look at the break even, and they look at this is in fact, the litmus test that I've got to use when deciding between whether nominal or link are attractive. And what we know is the volatility of break even is of the break even process is, is is basically dominated completely by the nominal. So what we know about that is that if break evens are wider, that's not because, um,

Speaker 0:
no, uh, link have rallied, but rather because nominal have sold off right. And that is exactly the case. What what's happened? Break evens have widened on account of average inflation expectations going up, but also an inflation risk premium also widening. We do some econometric work to disaggregate that, but we know that it's not only average inflation expectations that have widened, but also that inflation risk premium that is embedded in a nominal bond that the market expects just in case the central bank almost does it get its spot on the money at 4.5%.

Speaker 0:
So long end of the bond, uh, we like duration. We sort of out of the link, and we're not really playing in the money market drive by link space at all because you can get a better total return. Um, on the nominal. So really a very nominal centric portfolio. But things can change. You know, if yields do, in fact, come in, we might find ourselves moving. Fair enough. I mean,

Speaker 0:
it's a live portfolio, but as we sit today, it sounds like you have a similar view to me on on the inflation side of things. Sorry, Adam, we are running out of time here. Your portfolio. What are you doing? Are you buying credit? Because some people love it. Some people hate it. What are you doing?

Speaker 1:
Um, so, yeah, in in the credit space, uh, we are adding credits, um, to very high quality investment grade names. Um, whilst spread spreads have tightened spreads in South Africa, I would say credit spreads react much more to liquidity conditions than to fundamental credit risks, particularly in the high quality investment grade space and with changes in, um, the liquidity framework from the Reserve Bank. More recently, that has seen

Speaker 1:
very strong demand for local investment grade credit and and therefore, we're happy to pick up that enhanced carry in the portfolio. Um, for fairly low credit risk,

Speaker 0:
OK, and then the inflation link versus nominal. Do you broadly agree with me

Speaker 1:
on the nominal side? I mean our view on duration. Our positive view on bonds is predominantly predicated by the fact that we expect inflation to fall quite substantially over the coming 12 months. Um, even shorter, and that generally warrants shorter dated bonds out performing longer dated bonds.

Speaker 1:
We think valuations look attractive across the curve. So prefer the shorter end of the yield curve with regards to link, um, when inflation is falling that quickly Not really an asset class. You want to be overweight, um, in that environment, So we prefer nominal over link.

Speaker 0:
And do any of you have a dollar assets in your portfolios to hedge out rand risk? Mel, do you have any dollar assets? We do. Different portfolios have got different mandates, but we do have and, um, those that allow off. We do.

Speaker 0:
Uh um, it's a it's It's a much more interesting as a class now possible. So essentially, I think What's so nice about offshore? And we have to appreciate the gifts that the market gives us and their concerns. If you have to go too far out in the credit curve. Let's just use the US as an example you mentioned earlier how credit scores are so tight in the US. So you take investment. Great credit spreads haven't really moved out, so the best rate has moved higher. But spreads haven't.

Speaker 0:
And if we do go into slower growth slash recession later in the year, you would anticipate that those spreads would move wider so I can understand wanting to be a little bit cautious about going too far out in credit. But you don't need to, because Short Data du cash is getting you close to 5%. That's very attractive.

Speaker 0:
So we need We haven't had that luxury for a long time, so I think that's actually a really that's a really nice, um, alternative as the cost to have. So, yes, we do, and we're not taking considerable credit risks. So our corporate bonds or corporate runs, um, are re reasonably short dated, and cash is not a bad alternative. Um, cash.

Speaker 0:
Do you have dollar cash in your portfolio? Short term treasury? No, no. But it is an idea that we are that we do explore. I mean, it's quite interesting and quite compelling in its own right. I mean, as as, uh, me, he says. I mean, you're looking at, let's just say, just under 5% in US D terms. And the nice thing is just in terms of, let's just say you wanted to invest in, um, a US D instrument. Let's just say and you just say I want I want only that instrument

Speaker 0:
for its merits and I don't really want to take a currency view. You could knock on a rand forward there and get an extra 5% just in terms of, uh, interest rate parity and how the Rand forward is actually actually works. You could get in terms of you could. You could sign up today for a given level of Rand weakness. You know, given that you'd be long a dollar asset, so you'd basically get your 5% and then you'd get another 5% in terms of the rand forward. On top of that, so it's it's quite it's quite interesting.

Speaker 0:
It's quite it's a compelling thing to to think about, but again, when we put it through the total return meat grinder on our side, then we just think that there's just so much value at the long end of the curve that on a total return basis, it gets close, but it doesn't really get selected. Adam, I know you guys do your portfolio. Is that something you're continuing to do? Is it just a good hedging mechanism?

Speaker 1:
Yes. Um, I mean, from an

Speaker 1:
fixed exposure perspective. Um, we do. We do have an overweight dollar position in the funds. Um, that acts as a dampener against South African fixed income assets. And, um, with, um, our current account deficits or the deficits that we run. Um, we do have a fairly negative outlook on the local currency in terms of fixed income assets offshore. Um, I mean, we said earlier that we think fair value Treasuries is 3 to 3.5. We currently sit at 4% in the five year

Speaker 1:
and think there is reasonable value there. So do own some duration in that part of the US curve.

Speaker 0:
Gentlemen. Melanie, thank you so much. We could talk about this for hours. One of my favourite subjects. I'm very scary, but true. Uh, thank you so much for your time today. Thank you. Thank you. Thank you.