In mid-June, tensions between Israel and Iran escalated significantly. On June 13, Israel launched strikes on Iran’s nuclear and military infrastructure, prompting a retaliatory response from Iran in the form of missile and drone attacks on Israeli territory. The conflict sparked global concern over a potential broader regional war, particularly due to its implications for global oil supply.

Oil prices surged as markets priced in risk premiums, especially with the Strait of Hormuz, a vital chokepoint for global oil shipments located in the north of Iran being briefly threatened by the conflict. A ceasefire agreement was reached on June 24, which helped ease immediate tensions and brought some stability back to energy markets.

Bond yields across major markets were mixed in June. In Europe, 10-year yields in Germany and France rose by 13 and 11 basis points, ending the month at 2.61% and 3.28%, respectively. In contrast, the UK 10-year yield fell by 16 basis points to 4.49%, while the US 10-year yield declined by 17 basis points to 2.23%.

The Federal Reserve kept interest rates unchanged, maintaining a cautious stance amid trade tensions and inflation risks, while the European Central Bank cut rates by 25 basis points to 2.00%, signalling openness to further easing depending on economic data. Meanwhile, the Bank of England (BoE) held rates at 4.25% despite some members advocating for a cut due to weakening demand and trade concerns. The Bank of Japan maintained rates at 0.50% having raised rates earlier in the year, citing global economic uncertainties as the reason for their decision.

Locally, headline CPI inflation printed at 2.8% y/y in May, unchanged from the previous month. The upside pressure remains largely driven by food inflation, while favourable base effects from fuel prices continue to keep overall inflation below the South African Reserve Bank’s mid-point target of 4.5%. Core inflation, which excludes food, non-alcoholic beverages, fuel, and energy, also held steady at 3.0%. This reflects weak demand-pull inflation and points to financially constrained South African consumers.

June was not a Monetary Policy Committee (MPC) meeting month for the South African Reserve Bank (SARB), but we continue to see scope for another rate cut before year-end, should conditions allow. While low inflation creates room for potential easing, heightened geopolitical risks and recent oil price volatility suggest that, if a cut does materialise, it is more likely to come later in the year.

South African bonds continued to strengthen in June, supported by soft inflation data and increasing market expectations of another rate cut. Sentiment was further supported by commentary from National Treasury and the SARB around a potential shift toward a 3% inflation target. The SARB’s recent working paper, “Less Risk and More Reward,” argues that a lower, more credible inflation anchor would help re-anchor expectations, reduce bond yields, and ultimately lower long-term borrowing costs significantly over time.

Most of the gains on the nominal yield curve in June came from the long end. The yield on the long-dated R2048 bond declined by 28 basis points, while the R2030 yield fell by 22 basis points. As a result, the FTSE/JSE All Bond Index (ALBI) delivered a total return of 2.28% for the month, bringing the year-to-date return to 6.62%. Inflation-linked bonds delivered small positive returns over the period, with the bulk of the performance coming from the 3–7-year maturity bucket. The FTSE/JSE Inflation-Linked Index (CILI) and the Government Inflation-Linked Bond Index (IGOV) recorded returns of 0.62% and 0.61% respectively for the month.

Money market returns remained under pressure in June as short-term interest rates continued to trend lower. Both the 3-month and 12-month JIBAR rates declined by 22 basis points, ending the month at 7.29% and 7.67% respectively. Average yields on 6-month and 12-month Treasury bills also fell 14 basis points to 7.69% and 12 basis points to 7.84% respectively. The Alexander Forbes Short-Term Fixed Interest (STeFI) Composite Index delivered a return of 0.62% for the month.

The Rand saw increased volatility in June, initially weakening to levels over R18.00/USD mid-month as geopolitical tensions in the Middle East triggered a global risk-off sentiment. However, following the announcement of a ceasefire between Israel and Iran, risk appetite improved, allowing the Rand to recover some lost ground. By month-end, it had strengthened to around R17.71/USD. Despite the intra-month swings, the Rand ended June modestly firmer, supported by a weaker US dollar and growing expectations of monetary easing both locally and globally.

Looking ahead, we believe local economic fundamentals continue to support a lower yield environment over the medium term. Domestic growth remains subdued, and inflation is expected to stay contained in the near term. Monetary policy is likely to remain accommodative, creating room for further downward pressure on yields. The global backdrop is less supportive, however, with ongoing geopolitical uncertainty and the risk of ongoing tariff disputes posing potential headwinds. We therefore maintain our holistic investment approach which is anchored in macroeconomic fundamentals and responsive to evolving policy signals.