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Rand Bonds Roar Back: Top EM Carry Trade Returns
12 Aug
Summary
- Foreign investors bought 23.1 billion rand in government debt in early August.
- The South African rand carry trade has yielded 2.5% this month.
- Rand's implied volatility fell below realized volatility for the first time in three years.
Emerging market investors are flocking to South African rand bonds, marking the fastest pace of inflow since January. In the first week of August, net purchases of government debt reached 23.1 billion rand ($1.43 billion), according to JSE Ltd. data. This renewed interest has enabled traders to achieve a 2.5% return on dollar-funded carry trades this month, outperforming 21 other developing-nation currencies tracked by Bloomberg.
The appeal of South African bonds has been revitalized following a period of higher yields in March, which were driven by oil price concerns and inflation worries. Since then, yields on 10-year bonds have declined by over 80 basis points to approximately 8.57%, supported by moderating crude prices and a strengthening rand.
The rand has appreciated 5% against the dollar since late March, bolstered by a hawkish central bank and favorable interest rate differentials. Furthermore, implied volatility for the rand against the dollar over the next year has fallen below realized volatility for the first time in three years. This suggests market participants anticipate lower price swings, reducing the risk of currency depreciation undermining carry trade returns.
