Bloomberg News

South Africa Borrowing Costs Drop to Lowest Since 2009

September 06, 2011

(Updates with analysts’ comments from fourth paragraph.)

Sept. 6 (Bloomberg) -- South Africa’s borrowing costs fell to the lowest level since February 2009 at the sale of 25-year bonds on speculation a slowing global economy will prompt the central bank to cut interest rates from their 30-year low.

The Pretoria-based Reserve Bank sold 1.1 billion rand of 6.25 securities due 2036 at the weekly government debt auction at an average yield of 7.96 percent, the lowest since Feb. 21, 2009, and 23 basis points, or 0.23 percentage points, lower than at the previous auction on Aug. 26. The yield fell five basis points on the secondary market to 7.97 percent at 4:45 p.m. in Johannesburg.

The yield on the government 25-year bond has dropped 113 basis points since March 30 as investors bought the country’s higher-yielding assets on bets the central bank will lower its benchmark rate from 5.5 percent. Global funds have purchased a net 53.8 billion rand ($7.6 billion) of South African bonds this year, even as they sold a net 7.53 billion rand of shares, according to JSE Ltd. data on Bloomberg.

“It is difficult to fight the bullish bias in the rates market as long as the data stays weak, which is very likely to be the case for the remainder of the year,” Rand Merchant Bank analysts led by Theuns de Wet said in an emailed note.

The Reserve Bank also sold 1 billion rand of 6.5 percent notes due 2041 today at an average yield of 8.01 percent, the lowest in a year. The yield was 49 basis points lower than at the previous auction on Aug. 26, according to the Reserve Bank’s data on Bloomberg.

Rate Bets

Growth in South Africa’s economy, the continent’s biggest, dropped to an annualized 1.3 percent in the second quarter, its slowest pace in almost two years, as manufacturing and mining output plunged.

Traders have boosted bets on rate cuts. Forward-rate agreements starting in March, which investors use to lock in borrowing costs, dropped one basis point, or 0.01 percentage point, today to 5.13 percent, the lowest in at least 10 years.

Finance ministers from Germany, Finland and the Netherlands are scheduled to meet today to discuss a Finnish demand for collateral in a bailout for Greece. Italy’s Senate is set to debate an austerity plan amid a strike called by the nation’s biggest union. Growth in U.S. service industries slowed in August to the least in more than a year, economists said before a report today.

“The focus will remain on developments in the euro zone,” Tradition Analytics researchers led by Johannesburg-based Quinten Bertenshaw said in a research note. “Foreigners have held firm in their long local bond positions through the recent risk aversion. Outside of a major credit event, local bonds will remain firm.”

Fed Meeting

Pacific Investment Management Co., Goldman Sachs Group Inc and Royal Bank of Canada said last week they expect the Federal Reserve to announce plans this month to raise the average maturity of its bond portfolio by selling shorter-term debt and reinvesting proceeds from maturing securities into longer-term bonds. Thirty-year Treasury yields dropped as low as 3.21 percent today, a level not seen since January 2009.

“Some hedge funds, banks and traders are already starting to bet on yield curve flattening and I think this is supporting our longer rates,” said Michael Grobler, an analyst at Afrifocus Securities in Cape Town.

--Editors: Stephen Kirkland, Gavin Serkin

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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