A five rand coin. Picture: REUTERS
A five rand coin. Picture: REUTERS

The rand had its worst fall in more than a year on Tuesday, dragging local bonds along with it as traders priced in the increased possibility of a more aggressive stance from the US Federal Reserve.

Upbeat US retail sales data appeared to convince markets the Fed would raise rates another three times in 2018 as opposed to the priced-in twice.

The consensus is that the next increase will come in June, after the increase at the Fed’s March meeting.

The weaker rand hit South African stocks, with the all-share index losing 1.23% and the banking index dropping 4.5%.

The big four banks — Standard Bank, Barclays Africa, FirstRand and Nedbank — shed about R47bn in market value. A weaker currency usually leads to higher inflation, and eventually higher rates, which depress bank earnings and increase the risk of bad debts.

The rand fell as much as 2.5% to R12.65 a dollar, its worst one-day decline since March 2017. The yield on the benchmark R186 bond jumped 17 basis points to 8.49%. Yields rise as prices fall, increasing the cost of government borrowing.

Last week, foreigners sold a net R15bn of South African bonds, while dumping a net R4.1bn of equities.

The combined R19.1bn in outflows was the second-largest on record, second only to those seen at the height of the global financial crisis a decade ago.

The yield on the benchmark US 10-year bond rose above 3% again. Every time the yield has breached that level, it was driven by comments from central bank officials that some perceived as hawkish, according to Dow Jones Newswires.

“The threat of a faster trajectory of US interest-rate hikes holds a real risk to the downside for SA,” said Investec chief economist Annabel Bishop.

She expected US bond yields to rise above 3% from the second half of 2018 into 2019.

Odds that Fed officials will raise rates three more times in 2018 rose to 52% late on Monday, up from 39% a month ago, according to data from CME Group. Higher bond yields indicate greater market confidence that the central bank will hike rates in 2018 at a faster pace than factored in by the market.

Despite the US 10-year’s rise, views remain divided on what is to come. RMB Morgan Stanley have predicted that the 10-year could firm, pushing the yield down to 2.7% in the next 12 months. The bank based its view on the expectation that global growth had peaked, creating a more favourable environment for bonds.

The rand was not alone in its suffering, with the Turkish lira dropping about 2% to the dollar, its worst level on record.

“We get a sense that the market could be in for a rough ride based on the bad news coming out of some of the emerging-market constituencies, specifically Argentina and Turkey,” said Ashley Dickinson, head of fixed-income dealing at Sasfin Wealth.

With Andries Mahlangu