Duayne le Roux, Fund Manager at PSG Asset Management

South African bonds have delivered strong returns for investors year-to-date, with the FTSE/JSE All Bond Index (ALBI) returning 14% for the nine months to September 2025. What makes this notable, is that it follows shortly on the heels of similarly exceptional double-digit returns for the 2024 calendar year, at 17% (source: Morningstar Direct). Looking ahead, what should fixed income investors expect?

While last year’s rerating in local bonds was driven largely by the unwinding of the political risk premium, the drivers of the bond rally in 2025 are materially different. Bonds started the year off on a solid footing, offering attractive real returns. The South African Reserve Bank (SARB) then started signalling its intention to lower the inflation target to 3%, which added to the asset class’s long-term appeal. A weaker dollar has also made emerging market debt in general (South Africa included) more attractive to global investors. We further saw improvements in the terms of trade supported by strong platinum group metals (PGM) and gold prices. With local government bonds offering investors high real rates, foreigners have started taking note, with record inflows into SA government bonds from global investors. Additionally, we have more recently seen a period of relative political stability, and early signs of incremental improvements in the local economy.

Despite the recent strong run, we see scope for continued good performance from local government bonds, although we do expect returns to moderate. At the beginning of 2025, more elevated levels of inflation were expected, but inflation expectations have softened. An often-overlooked positive factor is that inflation volatility has also been trending lower – which will help the SARB reach the lower inflation target. Despite the uptick in recent purchases, foreigners still have only a marginal exposure to SA bonds, and further purchases can be supportive for the local market. Growth expectations remain extremely low, and therefore any further signs of an improvement in fundamentals will have a positive impact on the country’s fiscal position and hence the attractiveness of bonds. Continued stability in the Government of National Unity (GNU) and ongoing policy reforms also bodes well for markets and the economy.

There are risks to the outlook, however. Continued policy stability and implementation of the reform agenda is required to support further improvements in fundamentals. Supply shocks and geopolitical tensions could negatively impact the local economy and the inflation outlook. However, we remain cautiously optimistic on the road ahead.

Investors need to remain cognisant of their overall risk appetite and investment objectives while looking to capitalise on the continued strong real returns on offer from bonds. We believe investors will be well-served by experienced and proven managers, who take a flexible approach to managing risks in the market. This can help ensure portfolios remain optimally positioned to take advantage of opportunities in the market, while aiming to avoid capital losses, which can be especially detrimental to fixed income investors.