(Updates with minister’s comment from seventh paragraph.)
Feb. 1 (Bloomberg) -- South African government bonds are having their best start to the year since 2003 on speculation the central bank will keep interest rates on hold to support the economy even as inflation remains above its target.
Government fixed-rate debt returned 2.2 percent in January, the most for that month since 2003, according to Bank of America Merrill Lynch indexes, compared with 0.9 percent for inflation- linked securities. The bonds returned more than inflation-linked notes for the first month since October, the indexes show.
Investors are adding to bets the South African Reserve Bank will leave its benchmark rate at a 30-year low of 5.5 percent this year, maintaining a yield advantage over the U.S. and euro region. The Federal Reserve signaled last month it will leave interest rates low through 2014 and may embark on a third round of asset purchases, while the European Central Bank cut its benchmark rate twice last year to 1 percent, fuelling demand for higher-yielding assets, including South African bonds.
“With the economy looking fragile, the Reserve Bank would be extremely reluctant to hike rates,” Ian Cruickshanks, head of treasury strategic research at Johannesburg-based Nedbank Group Ltd., said by phone. “Also, there is a promise of greater liquidity from the Fed and the ECB, and with that in mind our bonds look very attractive at 7 or 8 percent.”
The central bank left its repo rate unchanged for a seventh consecutive monetary policy meeting on Jan. 19, citing concern that the euro region is facing a recession, which would hurt exports from Africa’s biggest economy. Forward-rate agreements starting in 12 months have dropped 18 basis points, or 0.18 percentage point, to 5.84 percent in the past week.
The yield on South Africa’s 6.75 percent notes due 2021 dropped 24 basis points to 7.74 percent in January. The securities yielded 7.75 percent as of 10:10 a.m. today.
South Africa’s economy will probably expand less than 3 percent this year as a possible recession in Europe, which buys about a third of South Africa’s manufactured exports, saps demand for exports, Finance Minister Pravin Gordhan said on Jan. 26. Gordhan, who will give updated growth forecasts in his budget speech on Feb. 22, said in October the economy will grow 3.4 percent this year. The euro area will contract 0.5 percent as a result of the worsening debt crisis, according to the International Monetary Fund.
Inflation remained above the central bank’s 3 percent to 6 percent range for a second month in December and will probably stay outside it for the rest of the year, Reserve Bank Governor Gill Marcus said on Jan. 19. It was 6.1 percent last month, according to the statistics agency.
“For offshore investors, local-denominated bonds can earn attractive yields plus the possibility of additional positive return on the rand’s recovery,” Michael Grobler, a Cape Town- based analyst at Afrifocus Securities Ltd., said by e-mail. The rand strengthened 4 percent in January, its best start to a year since 2006, according to data compiled by Bloomberg.
Foreign investors were net buyers of 6.2 billion rand ($795 million) of South African bonds in January, compared with 2.8 billion of purchases in December and net sales of 12.4 billion rand in January 2011, according to the JSE Ltd., which runs the nation’s bond and stock exchanges.
--Editors: Peter Branton, Ash Kumar
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