South Africa Yields Fall to Record on Foreign Demand; Rand Gains

South African bonds gained, driving yields to record lows, after Italy’s downgrade by Moody’s Investors Service made the debt of the continent’s biggest economy more attractive. The rand appreciated.

Yields on the nation’s 6.75 percent bonds due 2021 dropped six basis points, or 0.06 percentage point, to 6.98 percent at 3:30 p.m. in Johannesburg after falling to 6.95 percent earlier, the lowest on record, according to data compiled by Bloomberg. The rand advanced less than 0.1 percent to 8.3158 per dollar, trimming its second successive weekly decline to 0.6 percent.

Moody’s cut Italy’s bond rating two steps to Baa2, citing a deteriorating economic outlook. That pushed Italy’s rating two levels below South Africa’s, boosting the relative attractiveness of the country’s debt. The rand will probably return 6 percent by year-end, the best so-called carry trade among 16 major currencies, according to Bloomberg calculations based on current market rates and currency forecasts.

“The longer South Africa’s rating remains unchanged the higher its relative global rating climbs,” Quinten Bertenshaw, a Johannesburg-based analyst at ETM Analytics, wrote in e-mailed comments. “This can only be good from the perspective of fund flows toward South Africa.”

Foreign investors were net buyers of 2.3 billion rand ($277 million) of South African bonds yesterday, bringing foreign purchases this year to 58.3 billion rand, according to JSE Ltd. data. That compares with 47.3 billion rand for the whole of 2011.

Interest Rate

South Africa’s central bank has left its benchmark repurchase rate unchanged at 5.5 percent since November 2010 to aid growth in Africa’s biggest economy. Falling inflation may give the Monetary Policy Committee room to ease when it meets on July 19.

Inflation eased to 5.7 percent in May from 6.1 percent a month earlier, the slowest pace of increase in prices since September. Inflation is on a declining trend and will probably remain within the range through 2014, Reserve Bank Governor Gill Marcus said on July 4.

Forward-rate agreements, used to speculate on interest rates, dropped 2.5 basis points today to 5.17 percent, the lowest since November. The rate is 41 percent below the Johannesburg Interbank Agreed Rate, indicating traders see more than an 80 percent probability of a rate cut within six months.

“The parameters of debate within the MPC will be between doing nothing or cutting at upcoming meetings,” Bruce Donald, a currency strategist at Standard Bank Group Ltd. in Johannesburg, wrote in an e-mailed research note. “Lower inflation gives the Reserve Bank more room to manoeuvre; now the question is whether growth anxieties are or will become severe enough to prompt a rate cut.”

The risk of the economy slowing more this year has increased, Finance Minister Pravin Gordhan said in an interview in Los Cabos, Mexico, on June 16. Gross domestic product expanded 3.1 percent last year and will rise 2.7 percent this year, Gordhan said in his Feb. 22 budget.

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