South African bonds gained, driving yields to record lows, and the rand surged as Finance Minister Pravin Gordhan reassured investors on policy changes amid speculation the central bank will cut rates as growth slows.
Yields on South Africa’s 6.75 percent bonds due 2021 tumbled as much as nine basis points, or 0.09 percentage point, to 7.28 percent, the lowest since they were issued in August 2006, according to data compiled by Bloomberg. The notes yielded 7.30 percent as of 4 p.m. in Johannesburg. The rand gained 0.5 percent to 8.3930 per dollar, the best performance out of 16 major currencies monitored by Bloomberg.
Gordhan, in an interview at the ruling African National Congress conference, said the government is committed to attracting investment and will keep the budget deficit under control. Gordhan also said downside risks to South Africa’s growth outlook were worsening, adding to speculation the central bank will cut rates to stimulate growth. Yesterday, President Jacob Zuma called for “dramatic” policy changes to address poverty, unemployment and inequality.
“Bond yields are moving on the general theme that the Reserve Bank may be looking to cut rates,” Victor Mphaphuli, who helps manage the equivalent of $18 billion in fixed-interest investments at Stanlib Asset Management Ltd. in Johannesburg, said by phone. Gordhan’s policy reassurances “definitely helped” support the rand, he added.
Reserve Bank Governor Gill Marcus has kept the benchmark rate unchanged at 5.5 percent for a record 19 months as inflation topped the central bank’s 6 percent ceiling. Investors are betting she’ll follow Brazil, China and India in switching to stimulate the economy after the government cut its growth forecast for this year to 2.7 percent.
The central bank forecasts that inflation will slow to an average of 5.5 percent in 2013 from 6 percent in the second quarter. The bank’s mandate is to keep inflation within a 3 to 6 percent range.
Forward-rate agreements starting in December have dropped 29 basis points this month to 5.23 percent. The rate is 37 basis points below the three-month Johannesburg Interbank Agreed Rate, indicating traders see a near-75 percent probability of a 50 basis-point rate cut by the year-end.
“If you look at the FRAs, the market is really pricing in a rate cut,” Mphaphuli said. “Inflation has been coming down more than the market expected, and that is quite a positive.”
Proposals being considered by the ANC this week include a 50 percent windfall tax on mining companies, export levies on coal and iron ore, and capital-gains taxes on the transfer of mineral prospecting rights. The government has yet to make a decision on those matters, Gordhan said.
“A lot of what is being said at the ANC conference is just smoke and mirrors,” Brigid Taylor, head of institutional flow sales at Nedbank Group Ltd. in Johannesburg, said by phone.