CEEMEA Macro Strategy: South Africa: 1y1y-2y2y Steepener

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CEEMEA Macro Strategy: South Africa: 1y1y-2y2y Steepener

IdeaM1y1y-2y2y steepeners could offer attractive risk-reward: The curve has flattened

materially, as markets continue to price inflation risks and a proactive SARB stance, while

improved expectations on fiscals has kept the long end anchored. At the same time, ASW

compression has cushioned bond performance, with the sell‑off concentrated in swaps,

which has kept the long end of the curve more anchored. As a result, 1y1y–2y2y is now

close to zero—levels rarely seen in the past 15 years ( Exhibit 2 )— which could be an

attractive opportunity to position for steepening.

We see several potential catalysts for such steepening. First, we think USD/ZAR risks are

skewed higher, particularly if weaker precious metals begin to weigh on terms of trade,

which could lead to higher risk premia across the curve. Second, political risk is largely

unpriced, and local elections in November may well bring renewed uncertainty. Third,

while fiscal prudence remains our base case, growth risks and weaker commodity

dynamics could challenge that path into 2027.

From a scenario perspective, the trade is resilient. In a risk‑off environment, further hikes

are likely to drive the curve higher with less flattening shift and carry/roll supporting the

position. In contrast, a de‑escalation scenario would likely trigger a sharper steepening, as

inflation risks fade and global risk appetite improves.

Overall, we see multiple paths potentially leading to steepening, and enter 1y1y–2y2y

steepeners as it offers attractive risk‑reward at current levels.

The key risk to this recommendation is that the SARB hikes more than our economist

expects and fiscals remain strong.

We stay neutral on USD/ZAR: We remain neutral on ZAR, which continues to trade