South African Bonds Drop, Reversing Earlier Gains, on Bets Rally Overdone

South Africa’s benchmark government bond fell, reversing earlier gains, on speculation a rally in the securities to a record high yesterday was exaggerated given prospects that scope for further rate reductions may be limited.

The 13.5 percent security due September 2015 lost 15 cents to 126.35 rand as of 4:43 p.m. in Johannesburg, raising the yield by 3 basis points from yesterday’s close to 7.14 percent. That pared the weekly price gain to 72 cents and the yield’s five-day decline to 17 basis points, the biggest move since the week ended Aug. 20.

“I’d be cautious of bonds at these levels, they’re looking a bit overbought,” said Mark le Roux, head of fixed interest at Coronation Fund Managers in Cape Town. “We’ve seen huge flows into South African bonds this year but there’s definitely some profit-taking going on at the moment.”

South African bonds rallied yesterday, pushing yields to lowest level since Bloomberg began tracking the data in November 2004, after the monetary policy committee led by Governor Gill Marcus reduced the repurchase rate by 50 basis points to 6 percent. Policy makers also lowered their economic-growth forecast for this year to 2.8 percent from 2.9 percent and said inflation will remain within the 3 to 6 percent target until end-2012.

Marcus said scope for further rate reductions is “limited” due to rising wage settlements with unions and a recovery in consumer spending. The decision to reduce the rate by 50 basis points was forecast by 23 of 26 economists surveyed by Bloomberg and was the eighth reduction since December 2008.

Dovish for Scope

“The governor’s comments yesterday were dovish but they needed to be dovish to justify another cut this late in the cycle,” said le Roux. Marcus’s statement that scope for further rate reductions is limited should be taken “very seriously,” he said.

Foreign investors have purchased a net 72.1 billion rand ($10.03 billion) of South African bonds this year as near-zero interest rates in developed nations encouraged them to borrow cheaply and invest the money in markets offering higher returns. The inflows have helped the rand extend its rally against the dollar since the start of last year to 31 percent, prompting calls by manufacturers and unions for the central bank to lower its main interest rate to curb the currency’s yield advantage.

The rand gained for a third day, adding 0.4 percent to 7.1729 per dollar, from a previous close of 7.2024. Against the euro, the rand appreciated 0.3 percent to 9.1196.

The surge in South Africa’s currency has reduced the cost of imported oil and helped to slow inflation to an annual 3.7 percent in July, the lowest since April 2006. Still, unions blame the currency’s strength for undermining economic growth, which decelerated to an annualized 3.2 percent in the second quarter, from 4.6 percent in the first three months of the year.

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

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