South Africa Yields Hit Record Low on Index Addition; Rand Gains

South African bonds gained, driving yields to record lows, and the rand rallied on demand for the nation’s debt before its inclusion in Citigroup Inc.’s World Government Bond Index.

Yields on 6.75 percent notes due 2021 fell 14 basis points, or 0.14 percentage point, to 6.47 percent at 5:10 p.m. in Johannesburg, the lowest on record according to data compiled by Bloomberg. The rand advanced 0.9 percent to 8.1680 per dollar, a third day of gains.

The WGBI is tracked by money managers overseeing $2 trillion in assets, who use the gauge as a benchmark. Some money managers are buying bonds before the country’s inclusion in the index on Oct. 1, while others have rules preventing them from buying the debt before they’re included in the gauge, according to Ian Cruickshanks, head of treasury strategic research at Johannesburg-based Nedbank Group Ltd.

“We thought that most of the buying had been done, but it seems there is another stage of this flow coming in,” Cruickshanks said by phone. “That could push rates down and it is very bullish for the rand.”

Foreign investors have bought a net 37.8 billion rand ($4.6 billion) of South African bonds since Citigroup said on June 11 the nation’s debt would be included in the WGBI with a weighting of 0.41 percent. That brought total purchases this year to 73.1 billion rand, the most in a single year on record, according to data compiled by Bloomberg.

Data on foreign-investor purchases showed “a noticeable increase in the long position in” notes maturing in 2015, 2017 and 2020, Leon Myburgh, an analyst at Citigroup in Johannesburg, wrote in e-mailed comments. “This data probably reflects position-building into the WGBI.”

Higher Returns

Investors are also attracted by higher returns than those offered on the safest government securities from the U.S., Germany and Japan. South African 13.5 percent notes maturing in 2015 yielded 5.21 percent, compared with 0.35 percent for similar-maturity U.S. Treasuries.

“With that sort of yield differential, investors will take a bit of currency risk and come in,” Cruickshanks said.

Bonds also gained on speculation the central bank will cut interest rates again amid signs of slowing global growth. The South African Reserve Bank cut its forecast for economic growth this year to 2.6 percent, from 2.7 percent, on Sept. 20, when its Monetary Policy Committee left the benchmark repo rate unchanged at 5 percent. Governor Gill Marcus said the risk was for slower growth as she left the door open for a rate cut.

Rate Cut

Private-sector credit extension probably slowed in August and the nation’s trade deficit widened as exports slumped, reports will show on Sept. 27, according to the median estimate of economists in a Bloomberg survey.

“The probability of an interest rate cut by January 2013 has tipped past the 50 percent mark, based to a significant extent on the dovish tone expressed in the September MPC statement last week,” Bruce Donald, a strategist at Standard Bank Group Ltd. in Johannesburg, wrote in e-mailed comments.

Forward-rate agreements starting in six months, used to speculate on interest rates, dropped two basis points today to 4.76 percent. The rate is 32 basis points below the Johannesburg Interbank Agreed Rate, indicating traders are pricing in more than a 60 percent chance of a rate cut within six months.

The central bank cut the repo rate by 50 basis points on July 19, citing concern that the global slowdown will drag down local growth.

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

To contact the editor responsible for this story: Vernon Wessels at vwessels@bloomberg.net