Bloomberg News

South African Bonds Plunge as Rand’s Decline Dims Rate-Cut Hopes

September 13, 2011

Sept. 13 (Bloomberg) -- South African bonds had their biggest three-day decline in more than two years, driving yields to the highest in a month, as the rand’s decline against the dollar dimmed hopes of a central bank interest-rate cut.

The 6.75 percent securities due 2021 dropped 84 cents to 91.392 rand, driving the yield up 13 basis points, or 0.13 percentage point, to 8.059 percent, the highest on a closing basis since Aug. 12. The notes’ 3.6 percent decline in the past Sept. 9 is the most since the three days through Feb. 12, 2009.

South Africa’s currency has declined 7.9 percent this quarter, touching a one-month low versus the dollar yesterday, as investors shunned riskier, emerging-market assets on concern Greece will default on its debt. The weaker rand may fuel inflation, limiting the Reserve Bank’s room to lower borrowing costs in coming months, and erodes returns for foreign investors, prompting some to sell the debt.

The retreat “is related to the fall in the value of the rand,” Tertia Jacobs, an analyst at Investec Ltd. in Johannesburg, wrote in e-mailed comments toady. “The concern is that if the rand continues to depreciate, it could be inflationary and then there won’t be a rate cut.”

Inflation accelerated to a 17-month high of 5.3 in July, the statistics office said on Aug. 24. The central bank expects the inflation rate to exceed the 3 percent to 6 percent target range in the fourth quarter.

Rates Decision

The monetary policy committee, which will make its decision on Sept. 22, has left its benchmark interest rate unchanged at a 30-year low of 5.5 percent to help spur spending and support the recovery. It would “act appropriately” in the event of a global slowdown, Governor Gill Marcus said on Aug. 23.

Three-month forward-rate agreements starting in March, which investors use to lock in borrowing costs, climbed 1.5 basis points to day to 5.33 percent. The rate has increased from a low of 5.13 percent on Sept. 8 as traders reduced bets on a central bank rate cut.

“A substantially weaker rand will put rate cut speculation on ice,” Rand Merchant Bank analysts led by Theuns de Wet said in a research note.

Bonds extended their decline on foreign-investor sales of the debt as Europe’s debt crisis sapped demand for high-yielding assets. Foreign investors have bought a net 52.6 billion rand ($7.2 billion) of South African bonds this year, fueling a rally that drove four-year yields to a record low on Sept. 8.

Debt Auction

“It seems like non-residents are liquidating positions to some extent,” Jacobs said.

Demand for debt fell at an auction of 2.1 billion rand of government bonds maturing in 2021 and 2031 today. Investors bid for 2.5 times the amount of 10-year debt on offer, less than the 3.1 average bid-to-cover ratio of the previous 10 auctions, according to Citigroup Inc.

“The results show there is still nervousness from locals at these levels especially following the sharp sell-off in recent days,” Leon Myburgh and Coura Fall, Johannesburg-based analysts at Citigroup, wrote in e-mailed comments. “This almost entirely stemmed from the sell-off in yields globally amid increased nervousness about the euro area.”

--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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