South Africa’s rand is drawing renewed interest from global investors, with government bonds recording their strongest weekly foreign inflows since January.
Foreign investors bought a net R23.1 billion in South African government debt during the first week of August, according to JSE data. The renewed appetite has helped make rand bonds one of the most attractive emerging-market carry trades this month.
Investors using dollars to fund their positions have earned around 2.5% so far in August, the strongest return among 22 developing-market currencies tracked by Bloomberg.
Rand Strength Boosts Investor Appetite
The increased demand follows a period of volatility for South African bonds. Yields climbed to six-month highs in March as the Iran war pushed oil prices higher and raised concerns about inflation.
Since then, the benchmark 10-year government bond yield has fallen by more than 80 basis points to around 8.57%, while crude prices have moderated and the rand has strengthened.
The yield remains above its February low of 7.95%, however, leaving investors optimistic that further gains could be possible as South Africa’s fiscal position improves and inflation moves closer to the central bank’s target.
“If we see continued rand appreciation, bonds could price out a lot of upside inflation risks that have come into the price of yields since the rise in oil prices,” said Adam Furlan, a portfolio manager at Ninety One.
Currency Strength Supports the Carry Trade
The rand has gained around 5% against the dollar since the end of March, helped by expectations that the South African Reserve Bank will maintain a relatively attractive interest-rate differential.
This is particularly important for the carry trade, where investors borrow in a lower-yielding currency and invest in assets offering higher returns.
Lower expected rand volatility is adding to the appeal. Implied volatility for the rand against the dollar over the next year fell below realised volatility this week for the first time in three years, suggesting traders expect currency movements to become more stable heading into 2027.
Fed Outlook Could Give the Rand Another Boost
Expectations around US interest rates are also supporting the rand.
According to State Street senior emerging-market strategist Ning Sun, easing concerns over Federal Reserve rate hikes could strengthen the South African currency further.
Markets are currently pricing in roughly a 50% chance of a 25-basis-point US rate increase next month, compared with a 68% probability of a similar move by the South African Reserve Bank.
“The rand is partly carry, partly beneficiary of a weak dollar and dovish Fed,” Sun said, adding that the currency could be one of the strongest emerging-market ways to benefit from a weaker dollar.
With stronger foreign demand for government bonds, a firmer rand and expectations of moderating inflation, South Africa is increasingly standing out among emerging markets for investors seeking higher yields and currency gains.
Main Image: CMTrading
