South Africa Bonds Have Worst 5-Day Drop in Two Years on Greece

South Africa bonds fell for a fifth day, extending the biggest weekly slump in almost two years, as the threat of contagion from Europe’s worsening debt crisis prompted investors to dump high-yield, emerging-market assets.

The benchmark 13.5 percent government security due September 2015 fell 79 cents to 122.10 rand, extending its slide over the past week to 2.49 rand, the biggest weekly decrease since the five days ended May 30, 2008. The move raised the yield on the bond by 16 basis points from yesterday to 8.29 percent, for a weekly climb of 50 basis points.

Financial markets across the world dropped this past week on concern the European Union’s response to Greece’s debt woes won’t prevent the problem from spreading to other indebted nations in the region including Portugal and Spain. Emerging-market bond yields soared from Johannesburg to Brazil as investors raised bets the crisis will push up government borrowing costs and scupper the global economic recovery.

“We’re seeing steepening in most emerging-market yield curves as foreigners turn net sellers of their bonds,” said Kieran Curtis, a fund manager at Aviva Investors in London. “The dominant factor behind the negative price adjustment is the debt crisis in southern Europe.”

The threat of contagion prompted an emergency conference call by Group of Seven nations, indicating that finance chiefs from the world’s most developed nations may see escalating risks to the global economic recovery. European Central Bank President Jean-Claude Trichet yesterday kept the benchmark interest rate unchanged at 1 percent and resisted calls to announce further measures to contain the euro region’s fiscal debt problems.

Risk Aversion

“Markets are in panic mode and that’s causing severe risk aversion to high yield assets,” said Murat Toprak, an emerging markets strategist at Societe Generale in London. “We’re seeing big selloffs in all high-yield assets classes.”

South Africa’s rand snapped five days of declines versus the dollar, reversing an earlier slump to a six-month low, after Finance Minister Pravin Gordhan said “contagion” from Europe’s worsening debt crisis won’t reach South Africa. The currency traded 1.1 percent stronger at 7.6510 by 6:07 p.m. in Johannesburg, from a previous close of 7.7365.

“The immediate analysis or assessment is that such a contagion wouldn’t reach us,” Gordhan said in an interview in Dar es Salaam, Tanzania late yesterday, where he is attending the World Economic Forum on Africa.

Correction

The move in the rand pared its weekly drop to 3.5 percent, the biggest weekly slide since the five days ended Oct. 30, 2009. Earlier, the currency plunged as much as 2.8 percent to 7.9543, the weakest intraday level since Nov. 3.

“The rand is correcting after being heavily impacted by the panic selling we saw across all markets,” said Toprak. “Finance Minister Gordhan is completely right, there is no major sovereign risk in South Africa.”

Greece was given a 110 billion-euro ($140 billion) rescue package by the European Union and International Monetary Fund on condition it enact steeper reductions to its budget deficit. Greece’s parliament yesterday approved the austerity measures.

“We hope that Europe will deal with the issues more assertively and quickly and not allow for the doubts that have been created up to now to spread any further,” Gordhan said. “The only appeal we can make to European leaders is to deal more decisively with resolving the problem.”

The rand also recovered after a report today showed South Africa’s gross gold and foreign currency reserves (SANOGR$) climbed 0.8 percent last month as the bullion price increased and the central bank bought dollars to stem the rand’s gains. Reserves increased to $42.34 billion from $42 billion in March, the Pretoria-based South African Reserve Bank said on its website today. Net reserves climbed to $38.5 billion from $38.3 billion.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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