Bloomberg News

Yields Hit Record Lows as Rand Rallies on Stimulus Speculation

July 03, 2012

The rand rose to a seven-week high and yields fell to record lows on speculation central banks will take steps to spur growth, boosting demand for raw materials that account for almost half of South Africa’s exports.

South Africa’s currency advanced as much as 1.2 percent to 8.0619 per dollar, the strongest level since May 11. It traded 0.8 percent stronger at 8.0885 as of 4:21 p.m. in Johannesburg, extending its appreciation in the past four days to 4.4 percent. Yields on the nation’s 6.75 percent bonds due 2021 dropped 10 basis points to 7.15 percent, the lowest on a closing basis on record, according to data compiled by Bloomberg.

The European Central Bank is forecast by economists to cut interest rates this week to help curb the debt crisis, while a state-owned newspaper in China said the time is ripe for a reduction in banks’ reserve-requirement ratios. Declining employment figures in the U.S. this week may prompt the Federal Reserve to initiate fresh stimulus, BNP Paribas SA said.

“Sentiment seems to have improved globally, and there is a general uptake of risk,” Ion de Vleeschauwer, chief dealer at Johannesburg-based Bidvest Bank Ltd., the nation’s biggest chain of money-changers, said by phone. “We’ve seen a lot of demand from offshore players for the rand.”

The Standard & Poor’s GSCI Index of raw materials climbed to the highest level in more than a month as the prices of metals including copper, nickel and platinum rose. Metals and other commodities account for 45 percent of South Africa’s exports, according to government data.

The nation’s benchmark stock index advanced, led by commodity exporters including Anglo American Plc and BHP Billiton Ltd.

Risk Appetite

“The prospect of further monetary easing this week has whetted investors’ appetite for risk assets,” Nomvuyo Guma, a currency strategist at Standard Bank Group Ltd. in Johannesburg, wrote in e-mailed comments. “We expect the rand to maintain its gains” ahead of policy meetings this week, she added.

The rand was receiving a boost from South African companies repatriating foreign earnings after the June 30 fiscal year-end, De Vleeschauwer said. The currency may struggle to breach 8 per dollar, a level where many traders have clustered orders to buy dollars, he added.

Foreign investors are buying South African bonds at a record rate to lock in yields as much as 553 basis points above U.S. Treasuries for benchmark securities due 2021. Foreign investors bought 21.9 billion rand ($2.7 billion) of rand bonds in the past month, the most on record, according to data from JSE Ltd.

Investors are betting yields will fall further as inflation slows, giving the central bank room to cut interest rates. The one-year breakeven rate, or yield difference between inflation- linked fixed-rate bonds, which provides an indication of traders’ outlook for average inflation, dropped to 5.85 percent today, from 6.07 percent a month ago.

“The market is discounting more and more the chance of a rate cut,” De Vleeschauwer said. “That’s what is driving the bond market, and foreigners are very happy to buy our bonds.”

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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