South African bond yields plunged to records and the rand weakened on bets the central bank will signal interest rate cuts this week as the global economy slows.
Yields on the nation’s 6.75 percent bonds due 2021 fell 10 basis points, or 0.1 percentage point, to 6.79 percent, the lowest on record according to data compiled by Bloomberg. South Africa’s currency declined 0.1 percent to 8.2015 per dollar as of 3:35 p.m. in Johannesburg.
The central bank will leave its benchmark repurchase rate unchanged at 5.5 percent on July 19, according to 16 out of 18 economists in a Bloomberg survey. The bank may signal its willingness to cut rates in future if the global economy deteriorates, said Bruce Donald, a strategist at Standard Bank Group Ltd. in Johannesburg. Investors are betting on an interest-rate cut within six months, forward-rate agreements show.
“We expect the Reserve Bank to stay on hold at this week’s MPC meeting, although we believe that the chances of a cut by September or November are close to 50/50,” Donald wrote in an e-mailed note. “Interest differentials do matter for the currency, and especially so in a global financial market environment where there is little growth to be had, and which is thus characterised by a reach for yield, risk-on risk-off dynamic.”
Forward-rate agreements, used to speculate on interest rates, have dropped 10 basis points in the past month to 5.18 percent. The rate is 40 basis points lower than the Johannesburg Interbank Agreed Rate, indicating that traders are pricing in an 80 percent probability of a 50 basis-points rate cut within the next six months.
Bonds also gained on speculation Federal Reserve Chairman Ben S. Bernanke will indicate further stimulus today, boosting demand for riskier assets. Bernanke will deliver his semi-annual report on the economy and monetary policy before Congress today, after data yesterday showing a contraction in June retail sales kindled speculation the Fed will introduce more measures to support the world’s largest economy. Emerging-market stocks advanced, driving the benchmark index to a third day of gains. The dollar dropped against most of its 16 most-traded peers.
“A poor U.S. retail sales figure has been enough to generate dollar weakness, but not enough to create risk aversion,” John Cairns and Josina Solomons, currency strategists at Rand Merchant Bank in Johannesburg, said in e- mailed comments. “This is a perfect scenario for the rand. The markets are positive in the hope that this brings us closer to” monetary stimulus, the strategists said.
Additional steps to support the U.S. economy may boost demand for riskier assets including emerging-market bonds and commodities. Foreign investors bought a net 830 million rand ($101 million) of South African bonds yesterday, bringing purchases this year to 58.5 billion rand, compared with 47.4 billion rand for the whole of 2011, according to JSE Ltd. data.
The Standard & Poor’s GSCI Index of raw materials gained for a fifth day as the prices of metals including copper advanced. South Africa’s benchmark stock index rose. The nation derives 45 percent of its export earnings from metals and other commodities, according to government data for 2011.
“There’s a lot of expectation that they’ll hint at monetary easing or an increase in liquidity,” Ian Cruickshanks, head of treasury strategic research at Johannesburg-based Nedbank Group Ltd. (NED), said by phone, referring to the Fed. “This may be one of those occasions where you should buy the rumor, sell the news.”
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