South Africa Misses Inflation-Linked Auction Target on Yields

South Africa failed for the second straight week to raise its target in an auction of inflation-linked debt, as investors gauged a rally that drove yields to record lows had gone too far.

The National Treasury sold 354 million rand ($41 million) of securities protecting against inflation maturing in 2025, 2038 and 2050, according to the South African Reserve Bank, which conducted the sale today. Investors bid for 515 million rand of bonds, less than the 800 million rand on offer, the data showed.

Inflation-linked bonds have made better returns than fixed-rate debt since June as investors sought protection against rising prices fueled by double-digit wage increases, a weakening rand and rising commodity prices. Bondholders see inflation averaging 5.65 percent over five years, up from 5.47 percent before the Oct. 5 auction, when the Treasury got 690 million rand of bids for the 800 million rand of debt on sale.

Inflation-linkers “have run extremely hard,” Michael Grobler, a Cape Town-based analyst at Afrifocus Securities Ltd., said by phone. Investors “are taking a step back. The underlying demand is still there but investors would like to see real yields tick up a bit.”

Yields on 2050 CPI-linked notes have dropped 50 basis points in the past three months, reaching a record low of 1.91 percent on Oct. 4, according to data compiled by Bloomberg. Inflation-linked bonds pay interest on a principal amount that rises with consumer prices.

Inflation-linkers earned 8.3 percent since June 30, the best performance in at least a decade, compared with a 3.8 percent return for nominal bonds, according to Bank of America Merrill Lynch indexes.

The National Treasury isn’t concerned about the low demand at the auctions, according to an e-mailed response from the department to questions before today’s auction.

“There is generally good demand for inflation-linked bonds,” the Treasury said yesterday. “Interest does wane when real yields become too low. This is part of normal market activity.”

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