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Bonds in South Africa Rally as ECB Plan Prolongs Nation's Yield Advantage

South African bonds rose on bets investors bought the securities to benefit from their yield advantage following the European Central Bank decision yesterday to continue providing liquidity to its financial system.

The benchmark 13.5 percent security due September 2015 gained for a third day in four, climbing 42 cents to 124.47 rand by 4:47 p.m. in Johannesburg. That reduced the yield by 9 basis points, or 0.09 percentage point, to 7.33 percent.

ECB President Jean-Claude Trichet said late yesterday that policy makers will continue offering banks unlimited loans through the first quarter in an attempt to prevent the region’s sovereign debt crisis from spreading. The decision marked a shift from his stance last month, when he said the ECB may start limiting access to its funds in the first quarter.

“The ECB’s continued provision of liquidity is going to help the local bond market from a yield differential point of view,” Trevor Barsdorf, an analyst at Econometrix Treasury Management, said in a telephone interview from Johannesburg. “There is still some skittishness in the market but at current levels, South African bonds offer good value to yield-seeking offshore investors.”

Five-year bonds plunged in South Africa last week, raising yields to the highest since August, on bets Portugal and Spain could be forced to join Ireland in seeking a rescue package from the European Union to deal with high levels of government debt.

“There was a bit of a healthy shake-out in the local bond market after a very good run this year,” said Barsdorf.

Annual Surge

South African bonds have surged this year, pushing benchmark yields down by 108 basis points, as the central bank reduced its main interest rate to a record low 5.5 percent, boosting the allure of securities that guarantee a fixed return. The rate compares with deposit returns of 0.25 percent in the U.S. and 0.1 percent in Japan making South African bonds attractive to investors seeking higher yield assets.

The rand traded little changed against the dollar at 6.8839, from a previous close of 6.8861. Against the euro, the rand lost 1.2 percent to 9.2029, snapping a four-day advance.

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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