South African Yields Soar, Rand Slumps as Labor Unrest Spreads

South African yields rose the most more than two years and the rand slumped to a three-year low as strikes in the country’s mining and transportation industries spread to other areas of the economy.

Yields on benchmark 6.75 percent bonds due March 2021 climbed 28 basis points, or 0.28 percentage point, the most since June 9, 2010, to 7.01 percent by 3:50 p.m. in Johannesburg. The rand declined 1.8 percent to 8.9222 after earlier falling to 8.9942, the lowest since April 27, 2009. The rand retreated 5.3 percent last week, its worst week since September 2011.

Workers at Transnet SOC Ltd., South Africa’s ports and rail utility, will go on a one-day stoppage on Oct. 15, joining truck drivers who have been striking since Sept. 24. A union for municipal workers filed a notice to embark on industrial action nationally. Anglo American Platinum Ltd. fired 12,000 workers on Oct. 5 as illegal stoppages in the mining sector increased. The strikes may curb tax revenue as the government struggles to contain spending after Moody’s Investors Service cut the nation’s debt ratings.

“Money managers are looking at this and saying: maybe it’s time to liquidate our long-rand positions,” Ion de Vleeschauwer, chief dealer at Bidvest Bank Ltd. in Johannesburg, said by phone. “We’ll have to live with a much weaker rand for the foreseeable future.”

Sell Orders

The rand declined 3 percent on Oct. 5 as it breached so-called resistance levels, where traders cluster automatic orders to sell the currency. More so-called stop-loss orders may be triggered at 9 and 9.22 per dollar, Bruce Donald, a Johannesburg-based currency strategist at Standard Bank Group Ltd., South Africa’s biggest lender, wrote in a note e-mailed to clients today.

Moody’s cut the nation’s credit rating to Baa1 from A3 on Sept. 27, citing the government’s inability to deal with economic and political challenges. Bond yields rose 22 points last week even after the nation’s debt was included in Citigroup Inc.’s World Government Bond Index.

“The bond market got hit by an increase in global benchmark yields and ongoing concerns over the labor unrest in the economy,” Theuns de Wet, head of fixed-income research at Rand Merchant Bank in Johannesburg, and colleagues wrote in e-mailed comments. “Increasing pressure on the fiscus, lower growth and social pressures will continue to weigh on the sovereign risk premium.”

The rand’s three-month implied volatility against the dollar climbed 1.4 percentage points today to 18.3 percent, the highest in more than three months, indicating that options traders see wider swings in the currency in coming weeks.

Worse to Come

“The uncertainty that these developments generate is not good for financial markets or the currency,” Donald at Standard Bank said. “In the short term, the labor situation could get worse. We think it more likely than not that the rand will at least test the 9-per-dollar mark.”

The cost of insuring South Africa’s debt using credit default swaps over five years surged six basis points to 167, the highest since June 28. The extra yield investors demand to hold South African bonds maturing in 2021 rather than U.S. Treasuries climbed five basis points to 5 percentage points.

The rand may extend declines as volatility and a deterioration in risk perceptions prompt investors to sell the nation’s stocks and bonds, according to Shilan Shah, a London-based Africa economist at Capital Economics, which today revised its forecast for the rand to 9 a dollar by year-end, from a previous estimate of 8.75.

“There are compelling reasons to expect the rand to continue suffering falls in coming months,” Shah wrote in a research note e-mailed to clients today. “Domestic political unrest, a challenging external environment and a widening current-account deficit could lead to further losses.”

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