Bloomberg News

S. Africa Sells 600 Million Rand of Inflation-Linked Bonds

June 10, 2011

(Updates with analyst’s comment from fourth paragraph.)

June 10 (Bloomberg) -- South Africa sold 600 million rand ($89 million) of inflation-linked bonds amid speculation the central bank won’t raise interest rates to slow price increases driven by food and fuel costs.

The Reserve Bank auctioned 225 million rand of 2.75 percent securities maturing in 2022 at a yield of 2.52 percent, unchanged from the previous auction on June 3, according to the central bank’s data on Bloomberg. Investors bid for 2.2 times the amount allocated, it said. The bank also sold 375 million rand of 3.45 percent bonds due 2033 at a yield of 2.5 percent, one basis point, or 0.01 percentage point, lower than on June 3. Investors bid for 1.6 times the amount allocated. The bank didn’t accept any bids for its 2.6 percent notes due 2028.

Price increases in South Africa are driven mostly by “cost-push” factors such as international food and oil prices, which are beyond the effect of local monetary policy, Deputy Governor Daniel Mminele said on May 27. The consumer inflation rate rose to 4.2 percent in April, from 4.1 percent the month before.

“The MPC generally views the economic recovery as hesitant and the rise in inflation as temporary, caused by earlier spikes in global food and oil prices”, Nicky Weimar and Dennis Dykes, economists at Johannesburg-based Nedbank Group Ltd., said in a research note. “Consequently, the MPC will wait for more generalized inflationary pressures to emerge before tightening monetary policy.”

Breakeven Rate

The 10-year breakeven rate, or yield difference between inflation-linked bonds and fixed-interest securities of similar maturity, which gives an indication of bond investors’ outlook for inflation, has climbed nine basis points in the past four days to 5.73 percent. The Reserve Bank said in May it expects inflation to breach the 6 percent target in the first quarter of 2012.

Inflation-linked bonds, which pay interest based on a capital amount linked to the consumer price index, return more than fixed-interest bonds when the average inflation rate is above the breakeven rate.

--Editors: Ana Monteiro, Linda Shen

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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