South African Bonds Rally, Yields Fall to Record Low on Interest-Rate Cut

South African government bonds surged, pushing yields to the lowest levels on record, after the central bank reduced its benchmark interest rate for a second time this year as the rand’s rally helped curb inflation.

The benchmark 13.5 percent security due September 2015 advanced 60 cents to 126.64 rand as of 3:26 p.m. in Johannesburg. That reduced the yield by almost 13 basis points to 7.08 percent, poised for the lowest closing level since Bloomberg began compiling the data in November 2004.

Monetary policy makers reduced the repurchase rate by 50 basis points to 6 percent, Governor Gill Marcus said in a televised press conference from the capital, Pretoria today. That was in line with the forecasts of 23 of 26 economists surveyed by Bloomberg.

“The strength of the rand has been a key cap on inflation,” said Timothy Ash, the head of emerging-market research at Royal Bank of Scotland Group Plc in London. Marcus’s comments were “very dovish” suggesting “there could be scope for further cuts” in the main interest rate, Ash added.

The rand has surged 31 percent versus the dollar since the start of last year, curbing the cost of imported oil and helping to slow inflation to an annual 3.7 percent in July, the lowest since April 2006 and below the central bank’s 6 percent target. Even so, manufacturers and labor unions have blamed the rand for reducing South Africa’s export competitiveness, prompting calls for aggressive interest-rate reductions to reduce the currency’s yield attraction.

Economic growth decelerated to an annualized 3.2 percent in the second quarter, from 4.6 percent in the first three months of the year, as a global slowdown curbed demand for the country’s exports. The central bank expects the economy to expand by 2.8 percent in 2010, Marcus said.

South Africa’s currency advanced for a second day, appreciating 0.8 percent to 7.1841, from a previous close of 7.2424. Against the euro, the rand gained 0.8 percent to 9.1593.

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

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