Bloomberg News

South Africa CPI-Linked Debt Climbs Most Since August

June 02, 2011

(Updates with details of auction in fifth paragraph.)

June 2 (Bloomberg) -- South Africa bonds linked to inflation are posting their best returns since August as speculation grows rising oil and food costs will fuel faster consumer price increases.

Bonds tied to inflation returned 2.14 percent in May, the biggest advance in nine months, compared with a 1.4 percent return on fixed-interest government bonds, according to Bank of America Merrill Lynch data. Debt tied to the consumer price index in developed countries returned 0.989 percent last month, according to BofA Merrill Lynch’s global index.

Investors stepped up bets that South African price growth will accelerate after the government reported on May 31 that gross domestic product rose an annualized 4.8 percent in the first-quarter, beating the median estimate of 4.2 percent from 18 economists surveyed by Bloomberg. The yield gap between two- year CPI-linked debt and similar maturity fixed-interest notes, a gauge of inflation expectations, widened the most in more than two weeks on May 31 to 5.64 percentage points.

“We’re cyclically in an upward cycle in inflation, and that is a favorable environment for inflation-linked bonds,” Rashaad Tayob, who helps oversee about 800 million rand ($117 million) of assets including linkers at Aeon Investment Management in Cape Town, said by phone. “I still think there is a bit of value left, even though real yields are now quite low.”

Bond Rally

South Africa sold 605 million rand of inflation-linked debt, more than the 600 million rand it had planned to sell, at a weekly auction on May 27. The bank is offering another 600 million rand of the securities maturing in 2022, 2028 and 2033 on June 3.

Inflation-linked bonds started rallying in February after Reserve Bank Governor Gill Marcus said CPI may breach the upper end of the central bank’s 3 percent to 6 percent target range “sooner than expected” as oil and food prices surged. The yield on the 2.75 percent inflation-linked notes due in 2022 dropped 27 basis points, or 0.27 percentage point, to 2.515 percent on May 27, the lowest level since they were first sold. The yield was 2.52 percent at 9:45 a.m. in Johannesburg today.

The gap in six-year yields, or breakeven rate, climbed 8 basis points on May 31, the biggest one-day increase since May 13, the day after the central bank revised its inflation estimates higher.

Inflation Target

The central bank left its benchmark interest rate unchanged at 5.5 percent on May 12 to help support the recovery in Africa’s biggest economy, while warning that price pressures were intensifying. Forward-rate agreements starting in November were at 5.86 percent yesterday, implying a 62 percent chance of a 50 basis-point rate increase that month.

Inflation will probably peak at 6.3 percent in the first quarter of 2012 and will be close to the 6 percent ceiling for the rest of next year, Marcus said on May 12. The pace accelerated to 4.2 percent in April from 4.1 percent in March, the statistics agency said on May 17.

“The rising inflation story is still intact, and that’s going to add to returns in this asset class,” said Mark le Roux, who helps oversee about $29 billion of assets including inflation-linked securities as head of fixed income at Coronation Fund Managers Ltd. in Cape Town. “That being said, real yields have contracted. We’ve seen a fair amount of capital appreciation. The next lift to this asset class will come from rising inflation.”

Food, Fuel

Inflation-linked debt pays interest on a principal amount indexed to the consumer price index. When inflation accelerates, the securities pay more interest. They return more than fixed- interest bonds when average inflation is higher than the breakeven rate.

Rising oil and food prices are driving price growth, the central bank said in its Monetary Policy Review on May 24. Global food costs surged an annual 37 percent in April, the same pace as in March, according to data from the United Nations’ World Food Price Index. Brent crude oil climbed 21 percent in the past six months and was trading as high as $114.70 a barrel in London today.

--Editors: Ana Monteiro, Linda Shen

To contact the reporter on this story: Robert Brand in Cape Town at

To contact the editor responsible for this story: Gavin Serkin at

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