South African bonds: Marginally expensive, quietly attractive

A calm look at valuations in a year full of noise

Someone recently asked me what the most valuable market lesson of 2025 has been. My answer arrived faster than expected: markets do not care about your feelings. This year has provided almost comical evidence. South Africans spent much of 2025 doomscrolling through headlines warning of a Government of National Unity on the verge of implosion, the threat of US sanctions and yet another round of corruption cases. The chorus of bad news was so loud, yet the market had quietly moved in the opposite direction.

By mid-November, the JSE All Share Index had risen 37% for the year, the rand had strengthened 9% against the US dollar, and the local 10-year government bond yield had fallen by roughly 160 basis points. For a country hardly growing and teetering on the political brink, the local market delivered one of its strongest periods in two decades, eclipsing every year since 2003 for both equity and bond returns, measured year to date.

Graphic 1: The strongest YTD returns for local assets

Source: Bloomberg, Fairtree. Year-to-date return as at 19 November 2025 for the 2025 series. Lines represent all years since 2003.

Even compared with global peers, domestic assets held up impressively. A South African investor who left their offshore equity exposure unhedged would have earned a modest 4% on the S&P 500 or 8% on the Nasdaq, versus 18% on emerging market equities and close to 20% on the South African All Bond Index. Resources surged spectacularly (123%), helped by global dynamics, but local sectors also played their part: listed property gained 28%, banks 21% and bonds around 20% as local fundamentals slowly but noticeably improved.

Graphic 2: Local assets performed well relative to their global peers

Source: Bloomberg, Fairtree. Year-to-date return as at 19 November 2025. Total return indices used. Global indices shown in ZAR terms.

Government bonds tend to sense turning points in the macro cycle before equities. They respond to changes in monetary policy, inflation trajectories, fiscal stability and the broader growth outlook. Since the pre-election stress of April 2024, yields have collapsed by 380 basis points on the 10-year maturity, and the All Bond Index has gained 44%. On a risk-adjusted basis, government bonds have outperformed other asset classes, even the resource counters that dominated the headlines. With such a rally, it is natural to ask how much value is left in local bonds and whether the market has priced in all the good news.

Bonds are not overly expensive

The answer, perhaps surprisingly, is that South African bonds are not excessively priced. Our valuation analysis, spanning more than twenty years of data, suggests they are only marginally expensive. On most measures – outright yields, duration-adjusted yields and historical z-scores – government bonds would need to fall by another 50 to 100 basis points before they would screen as notably overvalued.

Graphic 3: South Africa 10-year yield (%)

Source: Bloomberg, Fairtree. As at Nov 2025.

Graphic 4: Different valuation approaches – measured in bps

Source: Bloomberg, Fairtree, Standard Bank. Data spans Jan 2003 to Nov 2025.

The argument also holds when comparing South African yields to those in the United States. The yield differential has indeed tightened, but justifiably so. The South African inflation target has now been formally adopted as 3% with a +/- 1% tolerance band, reducing the long-standing inflation differential between the two markets. After the National Election last year, both the credit risk premium and the non-credit risk premium linked to currency, liquidity and term-structure uncertainty have narrowed materially from the heights of the pandemic period. Even under conservative assumptions of a 1% inflation differential and a US 10-year yield anchored near 4.1%, the fair value range for the South African 10-year screens is around 8.25% to 8.40%. If the Federal Reserve eventually eases towards 3.25%, which is higher than market pricing, but plausible, domestic yields could drift to roughly 8.25% even in a mildly risk-off environment.

Graphic 5: Drivers of SA – US yield differential across different time periods

Source: Bloomberg, Fairtree. Data spans Jan 2003 to Nov 2025. Year-to-date return as at 19 November 2025 for the 2025 series. Lines represent all years since 2003. The credit risk premium is derived from the US vs. South Africa 10-year credit default swap. Non-credit risk premium is the residual risk explained by currency, liquidity and term premium uncertainty.

Longer-term scenarios paint an even more interesting picture. If the National Treasury sticks to its stated consolidation path, if the South African Reserve Bank succeeds in entrenching the 3% inflation target, and if growth edges higher as reforms slowly take hold, the risk premium could revert to something closer to its pre-2015 norm. Before the “Nene-gate” episode, the South Africa–US spread averaged just above 5%, but much of that reflected higher relative inflation. Adjusting for today’s lower inflation differential, the fair spread, driven by risk, not inflation, might sit nearer 200 basis points. That implies a long-run trading range for the South African 10-year yield around 7–8%, assuming US yields settle in the 4–5% region. In other words, the market may not be done rerating government bonds. Of course, achieving this may take years and requires conditions that are neither guaranteed nor fantastical.

Future gains will be led by global conditions

Many of the domestic catalysts, the SARB’s cautious cutting cycle, the new inflation target, the credible Medium-Term Budget, the one-notch upgrade from S&P, the lifting of the FATF greylisting, and the continued slow burn of Operation Vulindlela, have already played out. The GNU’s steadiness, despite doubts, has also removed a large chunk of political risk. There is still room for the SARB to cut more than the market prices, if inflation and inflation expectations continue easing, but the next leg of the rally will be driven primarily by global conditions rather than local developments.

The global backdrop has quietly turned into an ally. Emerging markets are enjoying an unusual moment of macro superiority: their inflation pressures are lower than that of developed markets; their central banks are earlier and more confident in easing cycles; and their fiscal trajectories, with exceptions, look less bad when compared with the swelling deficits of developed economies. Real yields in countries such as Brazil, Mexico, Colombia and South Africa remain compelling, especially at a time when the US dollar appears to have passed its cyclical peak. Several emerging markets are also commodity exporters benefiting from favourable price dynamics, which feed directly into government balance sheets. It is little wonder that emerging market local debt has returned 16% year-to-date and remains in demand.

South Africa, as a roughly 7% weight in the JPMorgan GBI-EM Global Diversified index, is well positioned to gain from accelerating emerging market demand. Foreigners have purchased nearly R100 billion of government bonds this year – more than four times the 2024 figure. Non-resident participation in weekly auctions has stabilised near 45–50%, far above the 30% norms of the previous five years.

Graphic 6: Foreign participation in local nominal bond auctions (%)

Source: Absa research, Fairtree. As at October 2025.

These flows appear more deliberate, more valuation-driven and structural. Meanwhile, China’s policy support, the evolving dynamics in the gold and platinum group metals market and steady oil prices suggest that South Africa’s terms of trade could hold up well. Strong commodity revenues act as a quiet but influential macro buffer.

Technical factors strengthen the case further. The first quarter of each year typically brings a wave of coupon payments, and more than R130 billion is expected in early 2026. Much of this capital finds its way back into the domestic fixed-income universe, creating a reliable reinvestment bid. In markets, momentum is often dismissed as a behavioural quirk, yet 2025 has shown how powerful it can be. From gold to AI stocks to emerging market assets, local bonds are not immune to such trends.

It is still worth acknowledging the risks. South Africa faces a substantial redemption schedule in the coming years, and the possibility of future state-owned enterprise bailouts can never be entirely dismissed. Long-term nominal growth remains modest, social spending pressures are real, and the country is inherently vulnerable to commodity cycles. In the immediate term, local bonds are prone to global risk-off events. Should the Fed be forced by (or lack of) activity and inflation data to pivot more hawkish, the rand will depreciate, and bond yields across emerging markets will rise. A spat with the US around foreign policy may also weigh on bond prices. What matters for valuation is whether they are rising or falling, and for now, the direction of travel is broadly stable to improving.

Conclusion

All things considered, South African government bonds remain only slightly expensive. They are close to fair value, not stretched, and they still offer the prospect of further gains if global conditions continue to ease. Another 25–50 basis points of yield compression are entirely plausible, and a 50-basis-point decline over the next year would translate into returns of roughly 12–13% on the All Bond Index. That would make 2026 yet another year in which South African fixed income can quietly outpace other asset classes.

The broader lesson is simple: the loudest headlines are often the least useful. South Africa’s fundamentals have improved more than generally acknowledged; global winds are shifting in favour of emerging markets; and despite a strong rally, valuations are not yet stretched. Bonds may not care about our feelings, but for now, they do care about fundamentals and the fundamentals justify a market that still has room to run.