South Africa Finds Linkers a Hard Sell as Inflation Fears Recede

  • Two straight sales miss target as tendered amounts dwindle
  • Breakeven rates falling as rand’s recovery mutes price rises

Bond investors are becoming less worried about inflation in South Africa, if weekly auctions of index-linked debt are anything to go by. 

Amounts tendered for the 650 million rand ($45 million) on offer each week have dropped by 64 percent since the beginning of June, with the last two auctions failing to reach the target. Inflation expectations as measured by the five-year break-even rate fell to 6.62 percent from 7.34 percent in the same period.

South Africa’s consumer inflation rate fell to 6.1 percent in May from a seven-year high of 7 percent in February as the rand recovered from January’s record low against the dollar and the central bank lifted its policy rate to 7 percent, the highest since 2010. Inflation accelerated to 6.3 percent in June, remaining above the Reserve Bank’s 3 percent to 6 percent target for a sixth month, data may show on Wednesday, according to the median estimate of economists in a Bloomberg survey.

The rand was 1.5 percent weaker against the dollar at 14.4526 at 4:49 p.m. in Johannesburg on Tuesday after gaining more than 2 percent on Monday. It has strengthened 7.1 percent against the dollar this year.

“A partial recovery in the rand, together with weak demand, should limit inflation’s breach” of the target, Mark Bohlund, Africa economist at Bloomberg Intelligence in London, said in a note on July 14. “With the rand having recovered from its January lows, further rate increases may be more difficult to push through.”

The South African Reserve Bank will leave the benchmark repo rate on hold on Thursday, according to all 23 economists in a Bloomberg survey.

“Inflation, while still uncomfortable for policymakers, has proved slightly more benign than expected,” Jeffrey Schultz, a senior economist at BNP Paribas Securities Ltd. in Johannesburg, said in a report on July 13. “South Africa could be nearing the end of its tightening cycle.”

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