South African Bonds Rise, Yields at Record Low, as Rate Cut Bets Continue

South African bonds rose for a second day, pushing yields to a record low, on speculation the central bank may reduce its benchmark interest rate further even after it said yesterday that scope for more cuts was limited.

The benchmark 13.5 percent security due September 2015 gained 5 cents to 126.56 rand as of 12:15 p.m. in Johannesburg. That reduced the yield by 1 basis point to 7.10 percent, poised for the lowest closing level since Bloomberg began compiling the data in November 2004.

Monetary policy makers led by Governor Gill Marcus yesterday reduced the repurchase rate by 50 basis points to 6 percent, saying inflation will remain within the 3 to 6 percent target range until the end of 2012. Policy makers also lowered their economic growth forecast for this year to 2.8 percent from 2.9 percent. Even so, scope for further rate reductions is “limited,” Marcus said after the decision.

“The governor delivered a dovish policy statement,” Standard Bank Group Ltd. analysts led by Michael Keenan in Johannesburg, wrote in a client note. “The dovish statement left the door open for more cuts, which will continue to encourage non-resident bond holders.”

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.

Slower Inflation

The rand gained for a third day, adding 0.2 percent to 7.1900 per dollar, from a previous close of 7.2024. Against the euro, the rand appreciated less than 0.1 percent to 9.1423.

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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