In this week’s market update by TreasuryONE and ETM Analytics, currency strategist André Cilliers and head of market risk Wichard Cilliers discussed significant shifts in global financial markets, notably the rising risk premium on US Treasuries and increasing gold reserves among central banks.
The discussion highlighted a notable rise in the term premium demanded by investors purchasing new US government debt. Recent data shows an increase of around 75 basis points, reflecting heightened market uncertainty linked to ongoing tariff disputes and unpredictable US economic policy decisions under President Donald Trump.
Higher term premiums significantly impact US fiscal policy, increasing interest obligations and potentially limiting available funds for tax cuts or other budgetary priorities. This trend warrants close attention, given its implications for the US economy and global financial stability. Parallel to rising term premiums, international holdings of US Treasuries have dropped to their lowest level in 22 years.
Major economies such as China, Russia, and Germany have steadily decreased their exposure to US debt instruments, shifting towards gold as a safer reserve asset amid increased geopolitical uncertainty. Central banks globally now hold approximately 18% of their reserves in gold, the highest proportion in over 25 years.
China alone has doubled its gold reserves over the past two years, increasing from 3.5% to 7.1% of total reserves. This clear trend reflects global investor caution and a desire for tangible assets amid financial volatility.
The upcoming release of US inflation data, particularly the Personal Consumption Expenditure (PCE) index, remains a key focus. The PCE is expected to be slightly above the Federal Reserve’s 2% target. However, recent tariff hikes, which are expected to push inflation higher, are unlikely to reflect fully in this data release, given inventory adjustments prior to the implementation of tariffs.
The Federal Reserve, under Chair Jerome Powell, will closely monitor inflation trends, market volatility, and tariff impacts before making future interest rate decisions. Analysts caution against anticipating immediate rate cuts, given the complexity of current economic conditions.
Amid global volatility, the South African Rand has benefited marginally from a weaker US dollar. Domestic political stability, despite ongoing uncertainties around the Government of National Unity (GNU) and budgetary processes, has supported the currency.
Analysts expect the Rand to continue trading within a stable band of approximately R18.25 to R18.75 against the dollar.
TreasuryONE advises market participants to implement robust risk management strategies during this period of uncertainty, emphasising that global volatility driven by US policy and geopolitical tensions is likely to persist. Stay informed and prepared as the markets continue to navigate through these dynamic conditions.