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South African Four-Year Borrowing Costs Fall to Record Low on Yield Allure

South African bonds gained, driving the yield on 2015 notes to a record low, as signs of slowing growth in the U.S. and Europe drew investors to the nation’s relatively high-yielding debt.

The 13.5 percent notes due 2015 added 24 cents to 123.16 rand as of 12:49 p.m. in Johannesburg, pushing the yield down six basis points, or 0.06 percentage points, to 6.87 percent, the lowest on a closing basis on record, according to data compiled by Bloomberg. The yield has dropped 104 basis points from its 2011 high on March 8.

Foreign investors have bought 4.7 billion rand ($655.4 million) of South African bonds in the past two weeks, even as they sold 5.9 billion rand of stocks as risk aversion rose after Standard & Poor’s cut the U.S.’s credit ratings on Aug. 8. The extra yield investors receive for buying South African four-year bonds rather than U.S. Treasuries is 6.15 percentage points, according to data compiled by Bloomberg. The spread has widened from 5.15 percent on Jan. 5, the smallest this year.

The rally in South African bonds “is purely foreign- driven,” Andre Roux, who oversees about 30 billion rand of bonds at Cape Town-based Investec Asset Management, said by phone. “It is more a response to global yields coming down; we’re moving in sympathy rather than opposition to them.”

U.S. Treasuries rose, extending a 57 basis-point decline in the 10-year yield over the past month, before a government report that economists said will show U.S. housing starts fell in July, signaling residential real estate is failing to contribute to economic growth.

EU Growth

Treasuries also gained as reports showed European economic growth slowed more than economists forecast in the second quarter as Germany’s recovery almost ground to a halt.

“As long as U.S. Treasury yields continue to fall, our market will follow,” Roux said.

Decelerating growth may prompt the European Central Bank to increase monetary stimulus, Tradition Analytics strategists led by Johannesburg-based Quinten Bertenshaw said in a research note.

“The more it becomes clear that global central banks are kick-starting the money creation process very aggressively, the better so-called risk assets will do,” Tradition said. “Local bonds will benefit from rebounding risk appetite going forward.”

South African bonds also gained on speculation the Pretoria-based Reserve Bank will delay an increase in borrowing costs as growth in Africa’s biggest economy falters.

Rate Outlook

While the central bank’s mandate requires it to keep inflation within a range of 3 percent to 6 percent, it also needs to consider the impact of interest rates on growth and employment. The Reserve Bank has kept its benchmark rate unchanged this year, after lowering it three times in 2010, even as inflation climbed to a 15-month high of 5 percent in July.

Standard Bank Group Ltd., Africa’s biggest lender, yesterday revised its interest-rate outlook, saying it expected the first increase in the third quarter of 2012. The Johannesburg-based lender had previously estimated a rate increase in the first quarter, analysts led by Michael Keenan wrote in an e-mailed report.

“The Reserve Bank will be able to live with a slightly higher inflation rate and will only want to pull the interest rate hiking trigger once growth is more established across the board,” Keenan said in a telephone interview.

To contact the reporter on this story: Robert Brand in Cape Town Nef at rbrand9@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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