South Africa Bond Yields Decline to 2 1/2-Year Low on Rate-Cut Speculation

South African bonds gained, reducing yields to the lowest in almost 2 1/2 years, after a lower-than- expected increase in household borrowing raised speculation the central bank may have room to lower its key interest rate.

The government’s 13.5 percent security due September 2015 rose for a second day, gaining 12 cents to 124.70 rand, reducing the yield by 3 basis points to 7.57 percent as of 9:31 a.m. in Johannesburg. A close at that level would leave the yield at the lowest level since February 2009.

Credit extension to South African households and businesses rose an annual 0.92 percent in June compared with a 0.8 percent gain in May, the Reserve Bank said on its website today. The median estimate of 16 economists surveyed by Bloomberg was for a gain of 1.1 percent.

“Subdued credit data, together with a better-than-expected CPI inflation outcome yesterday, could justify lower interest rates,” Michael Keenan, a currency strategist at Standard Bank Group Ltd. in Johannesburg, wrote in a client note.

Price growth in Africa’s biggest economy has decelerated for 15 of the past 16 months as a bumper corn crop and the rand’s almost 29 percent rally since the beginning of 2009 helped curb inflation.

Inflation slowed to 4.2 percent in June from 4.6 percent the previous month, lower than the 4.5 percent predicted in a Bloomberg survey, a report showed yesterday. The central bank has reduced its key rate by 5.5 percentage points since December 2008, leaving it unchanged at 6.5 percent on July 22.

Rand

Policy makers may decide to leave the rate unchanged “at least until September 2011” as unions drive up wages, according to Keenan. Even so, that would leave borrowing costs at the lowest level since the central bank first began using the repurchase rate in 1999.

The rand strengthened 0.3 percent to 7.3160 per dollar, from a close of 7.3381 yesterday. Against the euro, the rand lost less than 0.1 percent to 9.5337.

Money-market investors increased bets that South Africa’s central bank will lower its main rate when it next meets on Sept. 9, forward-rate agreements show. The cost of three-month contracts for cash in three months fell 1.5 basis points from yesterday’s close to 6.225 percent.

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

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